Are the Gold Majors a Buy Again?

Barrick Gold (NYSE: ABX  ) , Newmont Gold, (NYSE: NEM  ) , Goldcorp (NYSE: GG  ) , Freeport-McMoRan (NYSE: FCX  ) , and others have seen scary declines in their share prices since all-time highs in 2011. 

Barrick Gold hit $55 per share and is now at $18, a decline of 67%! Likewise, Newmont's high is $70, and it now trades hands near $25, down 64%. Goldcorp is "only" down 50% and Freeport-McMoRan is down about 40%. Freeport is also a very large copper producer, so that has helped it outperform those other pure-play gold majors.

Underlying gold price decline tells only part of the story
With many of the majors' stock prices down by a half to two-thirds, the first question to ask is how much did the underlying gold price decline? From about $1,900/oz. to today's roughly $1,300/oz., gold is down about 30% from its 2011 peak. Yet, Barrick and Newmont, off by more than 60% each, are down twice as much as the gold price. How could that be? 

For the most part, the majors did just about everything wrong. With gold at $1,900/oz. and seemingly headed above $2,000/oz., the majors simply got fat and stupid. There was room for corporate excess and empire building, and the management teams dove right in. Growth for growth's sake became the norm because growing profitability seemed assured. Bloated expenses of epic proportions followed, and debt levels rose significantly as well.

More specifically, instead of concentrating on prudent, profitable, organic development, the majors went on an acquisition spree. That took them to far-flung corners of the world, where they paid large sums to inherit projects will all sorts of known and unknown risks. For example, Barrick and Newmont ran into huge resource nationalism problems in certain countries. For Barrick, look no further than its ill-fated Pascua-Lama project in Chile. That project is currently stalled after billions of dollars have been spent with billions more to go. Newmont and Goldcorp also got saddled with projects in places like the Dominican Republic that locals did not approve of. 

Elevated costs destroyed the attractive dividend-paying model
In addition to growth with reckless abandon, the majors allowed operating costs to rise too high. Not just operating costs, but a new cost measure called "all-in sustainable costs," which includes all cash and non-cash expenses to explore for, develop, mine, sell, and reclaim projects. Again, with the gold price at $1,900/oz. and all-in costs creeping up to $1,100/oz.-$1,200/oz., management teams were asleep at the wheel. A victim of management's self-inflicted wounds was dividends. Barrick and Newmont have slashed dividends with no rebound in payments expected anytime soon. 

Have the majors fixed the problems?
Many of the CEOs of the majors in 2010-11 were fired. Excessive debt, especially at Barrick but also at others, has been reduced. Costs have been cut and assets have been sold. Over the past 18 months, these companies have done a great deal to fix the problems they created. Is it enough? Probably not.

Bottom line
The only way in which the majors would be attractive investments today would be if the gold price were to increase by 20% or more. The majors have made some progress righting the ship, but they now face problems growing production from 2017-18 on. And, they no longer pay attractive dividends. I don't believe the majors offer a compelling risk/reward at current levels. 

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