A brief analysis on Barrick Gold: where is gold headed?

Topic discussed:

  1. George Soros loads up on Barrick Gold, do Soros Funds have too much skin in the game or are they calling a gold rush?

Headline Indices

  • ASX 200 closed at 5,312.59, down -0.12% this week and sitting 58% above 52w lows;
  • CSI 300 closed at 3,163.99, down -0.79% this week (markets closed Thursday and Friday) and sitting 13% above 52w lows;
  • Hang Seng closed at 21,042.64, up 0.46% this week (markets closed Thursday only) and sitting 30% above 52w lows;
  • FTSE 100 closed at 6,115.76, down -1.51% this week and sitting 44% above 52w lows;
  • TSX closed at 14,037.67, down -1.33% this week and sitting 71% above 52w lows; and
  • S&P 500 closed at 2,096.07, down -1.46% this week and sitting 89% above 52w lows.

Bonds: a short comment

Government bond yields must become the headline story ahead of the FOMC’s upcoming June Funds Rate decision, as any further (unexpected) large scale asset repurchase program central banks enact will drive government bond yields lower – can they go lower?

Gov Bond Yield.PNG

US 10-year yield has dropped 31% in the last year, while the German 10-year has dropped 98% in the last year.

Investors, mostly institutional, continue their uptake in government bonds – the German 10-year yield dropped 70% from 67 basis points (June 3rd) to 20 basis points (June 10th). Had we taken the yield of 113 basis points on June 2nd, Friday’s close yield would have represented an 82% drop.

Some argue that investor appetite for government bonds has now become a hunt for yield. I disagree, investor appetite still follows a traditional flight from risk and is a function of the ECB QE program – when demand (i.e. ECB QE buying) is artificially high then prices must drop to (artificially) lower level.

Alternatively, fund mandates, which require a significant allocation towards high-grade sovereign debt, could see regulation worsen the outlook on risk-free rates. We have reached the point where central banks continue to distort traditional market signals, making it more difficult for investors to interpret a fair value for bonds.

George Soros bullish on Barrick Gold

The SEC 13-F is a quarterly filing by institutional fund managers with AUM >$100m which discloses their equity and bond positions.

Soros Fund Management, in their most recent 13-F, declared that Barrick Gold became their largest holdings, effective date as of March 31, 2016. The fund had completely divested out of Barrick in mid-2015 after the share price dropped 50% to $6-7/share within two weeks.

Barrick vs. Gold price.PNG

For the 61-day period between January 1st and March 31st, 2016 the Barrick share price and Gold futures price held a pearson correlation coefficient of 0.69 – suggesting strong correlation.

Soros Funds net position in Barrick was 19,419,309 shares, equating to 1.67% outstanding shares. This is particularly impressive since the share price has risen 75% over the 61-day reporting period, equating to a 1.23% gain per day.

Barrick Top 5 shareholders

Gold futures are the leading indicator in gold company profitability, since the company’s profitability is effectively the net of LBMA spot prices (price returned for dore gold bars) and the company’s AISC (all-in sustaining cost). Thus, the ‘funamental value’ of a gold company will depend on your outlook on gold futures – heightened geo-political risk and a stronger dollar should translate into a higher gold price.

Barrick Bonds

Interestingly, Soros Fund 13-F did not disclose a position in Barrick bonds, which currently have the following yield curve:

sg201606091158.gifBarrick Gold’s yield curve was self-created and is not a standard function as part of Bloomberg Terminal.

Barrick bonds yields have risen significantly in the last month as 1-6m yields have shown bearish returns:

Barrick Bonds.PNGBarrick Bonds 2.PNG

Barrick Gold Comparables

The following table is a brief overview of the eight largest gold miners with market capitalization >US$10 billion:

Equity Valuation

Gold comps - equity valuation.PNG

  • EV/EBITDA: a lower ratio would be most suitable – Newmont and Newcrest appearing to have the strongest ratios;
  • P/E: this is the clear sign that gold miners are overpriced;
  • P/B: another clear sign that gold miners are overpriced relative to their book value

Profitability

Gold comps - profitability.PNG

  • A notable exception among the top eight gold miners, despite LBMA prices returning to pre-2009 levels, is Franco-Nevada who do not operate mines but manage their royalties and streams only, hence recording one of the lowest revenues among its peers.
  • Top and bottom line margin growth is inconsistent among the eight miners, further questioning why share prices have grown so rapidly since January 1st.

Market Return

Gold comps - market return.PNG

  • Despite weak fundamentals, all eight gold miners have seen their share prices, bar Saudi Arabian Mining, risen between 43%-166% since January 1st (Barrick being the gold miner seeing a 166% return YTD).
  • However, on a 3-year and 5-year annualized basis, the three largest gold miners (Barrick, Newmont, Goldcorp) have seen a negative growth in their share price, while the three smallest comparable miners (Franco, Newcrest, Agnico Eagle) have seen strong growth in their share price.

Pricing Indicators

Gold comps - market performance.PNG

  • RSI: all relative strength index indicates that share prices are already in the overbought territory and nearing its breaking point of 70;
  • MA: Barrick, Newmont, and Agnico are those notables sitting above their 100D moving average.

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