What Can We Learn From Barrick Gold's Mistakes?

Upheaval in the mining industry shows the utter importance of risk management. Any miner with enough money can eventually pull something out of the ground. Few miners can grow without maintaining a handle on costs and keeping a clean balance sheet.

Diversification and risk management come in many forms. Taseko Mines (NYSEMKT: TGB  )  is constrained because the majority of its projects are in a single government's jurisdiction. Barrick Gold (NYSE: ABX  )  is in a hard place too because of its high debt load. These two Canadian miners were hoping for a smooth market with stable outcomes, but reality got in the way. Now investors are stuck paying the price. 

Taseko's fiasco
Taseko is a small Canadian miner with a number of properties in British Columbia. Developing properties in highly developed nations usually comes with the advantage of political stability but at the cost of increased push-back from environmentalists. Taseko's big problem is that all of its key development properties are in British Columbia. Now the company is wishing that it had some exposure to other governments.

Taseko's New Prosperity mine was recently disapproved yet another time by the Canadian government. The aggravating part of the situation is that the government did not look at Taseko's latest design; instead it used an older setup. The government's dismissal is based on faulty data, so Taseko is stuck waiting for another round of governmental talks.

New Prosperity is very important to Taseko. The property has a valuation of around $2.3 billion, making it 61.3% of Taseko's mineral assets. The government's behavior during the approval process has been very poor; Taseko's focus on British Columbia means that investors should expect a very long road before the company can get to where it wants to be.

The downsides to short-term-ism
The average NYSE holding time was above 10 years in the 1950s and 1960s. Recent data shows that by December 2012, the average holding time has fallen to 1.7 years. Wall Street's constant call for growth pushes companies to pursue growth at all costs. During the recent boom, Barrick Gold put the pedal to the metal; now it has a total debt-to-equity ratio of approximately 1.1. Such a high debt load is a big negative for a company in the volatile gold-mining industry. 

The positive side is that Barrick has been able to cut costs. It expects 60% of its production to have an all-in sustaining cost from $750 per ounce to $800 per ounce in 2014. The downside is that cash flow pressures and other issues forced the miner to cut its asset base from 27 mines in 2013 to an expected 19 by the middle of 2014.

In 2014 alone management expects that gold production will fall by 9.7% to 16.7% relative to 2013 levels. Barrick's efforts to cut costs have paid off, but the result is that production is falling and cash flow is tight.

The other side of the coin
Not all Canadian miners are like Taseko or Barrick. Teck Resources (NYSE: TCK  ) is a more diversified copper, zinc, and coal producer. Its copper operations have partially shielded Teck from contractions in the coal industry, giving the company an overall profit margin of 10.8%. Teck's total debt-to-equity ratio is 0.4, showing that it has a flexible balance sheet.

By buying into the Fort Hills oil sands operations, Teck is trying to follow Freeport-McMoRan and become even more diversified. In the immediate future, Fort Hills' margins are not expected to be amazing. New oil sands mines are expensive; Suncor estimates that the project will have an internal rate of return of around 13% -- significantly lower than some IRRs in the Eagle Ford. The upside is that Teck's balance sheet is clean enough that it can afford to take some risks.

In many ways uranium miner Cameco (NYSE: CCJ  ) is in a better position than Teck. Cameco has even less balance sheet risk with a total debt-to-equity ratio of close to 0.3. While Cameco's production is focused on Canada, it is diversified thanks to its Inkia mine in Kazakhstan and two mines in the U.S. 

Cameco has decided to cut back its growth plans, but the company still has a 13% profit margin in a market where demand is expected to increase over the long term. 

The bottom line
Taseko and Barrick are stuck dealing with their earlier growth strategies. Taseko has a great deal of exposure to the Canadian government and its regulatory quirks. Barrick Gold's large debt load is forcing it to cut back production in order to rein in costs.

Risk management is crucial for any miner. Teck and Cameco have brighter futures thanks to their diversification. It is important to note that Teck's latest venture into oil sands mining could end up producing low margins. In the meantime Cameco has a strong future ahead with a diversified array of uranium mines and reserves.

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