Gold stocks have had a difficult year. As a group, they underperformed gold bullion; however, there have been signs of life, as a large number of buyers have stepped in over the recent weeks to accumulate shares of gold stocks. One of these gold stocks that have had some issues in relative performance is Barrick Gold Corporation (NYSE/ABX). Recently Barrick Gold’s CEO Aaron Regent was let go due to the poor performance of the stock price. It is rare for one of the most stable gold stocks around to make such a dramatic change. But it appears this catalyst might offer a long-term investor in gold stocks an interesting opportunity.
One of the biggest gambles by the former Barrick Gold CEO was in buying Equinox Minerals Ltd, a mining company that extracted copper. This gamble to generate corporate earnings in a more diversified portfolio seems to have backfired. Many investors in gold stocks only want the company to be involved in a single commodity, as it’s easier to price as an analyst. However, with the acquisition, approximately 20% of Barrick Gold’s production is now in copper. The recent slowdown of not only the U.S. and Europe, but also China, has caused copper prices to drop dramatically. There are rumors of large contracts related to copper, iron ore, and other industrial metals being canceled by Chinese buyers.
In any case, we know from the charts that copper prices have dropped significantly and world growth is slowing. This should impact Barrick Gold’s bottom line, as it is more exposed to industrial metals like copper, as opposed to pure gold stocks.
In addition, Barrick Gold also has extensive properties in Africa, of which several regions continue to be very unstable. Combine this with higher costs at several mines, including a large property on the Chile-Argentina border, and you have serious concerns on the part of investors in Barrick Gold. While Barrick Gold has raised the estimated costs for this particular mine already, there are rumors that higher costs might be incurred.
The truth is that Barrick Gold is one of the most stable gold stocks around. For the very long-term investor, opportunities that are short-term in nature can offer attractive entry points. While copper prices will most likely remain somewhat depressed because of slowing worldwide economy, if additional stimulus is enacted in a coordinated effort, we might then see a rebound in prices. In fact, I would say that, if we see a massive stimulus package worldwide, then perhaps copper is hitting a near-term low in price as well as gold.
The other thing to note is that all of this negative information is most likely priced into Barrick Gold’s share price. If this is as bad as it gets, then Barrick Gold’s shares are on sale. With the new CEO coming in, I think it highly likely that he and the entire management team would like to make positive changes. No one can predict the future, but buying when everyone else is selling can be a good long-term strategy if the gold stocks are fundamentally sound. Barrick Gold will be around for a long time and this is an opportunity for the new CEO to make a positive impact on the share price.
Chart courtesy of www.StockCharts.com
Barrick Gold has rebounded from the May lows along with several other gold stocks. It appears there are very large institutional buyers coming in at a steady pace, accumulating gold stocks. With the stock still below the 200-day moving average, I would watch for some sellers distributing shares at that region. Frankly, I would like to see the financial statement from an additional quarter to ensure costs are under control. Overall, the technical situation is implying that Barrick Gold is most likely going to drift higher, although in a relatively tight trading range, most likely hitting resistance at the 200-day moving average. If gold prices continue to move up, we should see this translate as well into Barrick Gold and other gold stocks. With the Federal Reserve out next week, a policy decision for more monetary stimulus could provide the catalyst for just such a move.