Barrick Gold’s Perfect Storm

Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Barrick Gold (NYSE: ABX) seems to be in the midst of a nearly perfect storm of company events, major economic releases and general market conditions. These events have conspired to drop the stock’s price by over 11.5% in the last five days. The question that now must be asked is whether the decline represents a buying opportunity or if the fall is an indication of things to come. Ultimately, while there are some structural concerns that should be understood prior to deploying any capital, the drop in Barrick’s share price gives investors a great chance to acquire shares at an attractive level.

The First Storm Front: Earnings

Last Thursday, Barrick reported earnings that significantly missed analyst expectations. The company’s $0.62 per share earnings were well below the consensus $1.00 per share expected, and even further below the $1.36 the company earned in the same quarter a year earlier. Revenues declined 13.5% to $3.44 billion, which was also below the $3.59 billion that was expected. The company attributed the miss partially to lower gold prices, but also to a 7.7% decline in gold production and a 20% decline in copper production. Finally, the company said it now expects gold production costs to rise from $550 to $575 per ounce to the $575 to $585 per ounce range.

Higher production costs are not limited to Barrick, however, demonstrating that the problem is systematic as opposed to company specific. Newmont Mining (NYSE: NEM), which recently released its own earnings miss of $0.86 per share as compared to an expected $0.89 per share, reported that its costs had jumped from $622 per ounce a year ago to $693 an ounce in the most recent quarter. Not only are Newmont’s cost significantly higher than Barrick’s, they seem to be growing at a higher rate.

The Second Storm Front: Economic Data

There were two significant pieces of economic data released last week that either had an immediate impact or have the potential to drive prices over time. Thursday’s release of strengthening Chinese PMI indicates that economic conditions are improving and becoming more stable. While gold did not immediately react to the news, economic stability in China is bearish for gold over the medium-term.

Having an immediate impact on gold prices was the release of the non-farm payroll (NFP) statistics by the U.S. Board of Labor Statistics. According to the release, the NFP number grew by 171,000 as compared to the 125,000 that was expected. While the overall unemployment rate – yes, the one that specifically ignores the underemployed and those that have given up looking – ticked up to 7.9% from 7.8% a month ago, the “positive” news caused gold to shed $40 in its largest single-day decline this year. Falling gold prices are bad for gold stocks and helped Barrick to shed 3.6% to go with the 8.4% decline during Thursday’s session.

The jobs data also hit Goldcorp (NYSE: GG), which recently announced better than expected earnings, and Kinross Gold (NYSE: KGC) as well; Goldcorp was down 4.9% during Friday’s session and Kinross was down 5.4%. The broad move helps to confirm the market’s feeling about gold, having not limited the move to companies with earnings misses. As one would expect, gold stocks tend to be sensitive to the prevailing price of the commodity.

The Eye of the Storm : Election Day

Where company-specific news and global macro statistics meet to really lean hard on Barrick’s shares is on the political stage. With the election just days away, the very real possibility that Governor Romney will take over is the proverbial cherry that makes this the perfect storm. Before any more mixed metaphors complicate the picture further, a Romney win is considered bearish for gold, owing largely to his pledge of tighter fiscal policy and protective measures that would strengthen the dollar. The polls have the candidates virtually tied, meaning that gold investors must face the prospect that Obama’s gold-driving policies may be short-lived.

Be a Storm Chaser

While I agree that a Romney win is both a real possibility and a bearish signal for gold, there are too many global macro factors currently at play to call an end to the commodity’s uptrend. Furthermore, there is a real danger in using “typical” measures when analyzing gold companies. Simply looking at earnings trends misses the reality that gold prices can fluctuate dramatically, wreaking short-term havoc on earnings consistency. This consideration, that is useful for other large cap stocks, is somewhat lost in this context.

Barrick is the largest gold miner in the world and is well positioned looking ahead. The company is making serious efforts to take a portfolio driven approach to operations, rather than the grow-at-all-cost approach favored by some of its peers. Keeping an allocation to gold is prudent, and the ability to buy Barrick nearly 12% lower than it was a week ago should not be missed.

Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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