Barrick Gold Nails The Hedge

February 27, 2009

The close-to-pure-play miner reported earnings last week. Here's a look under the hood.
  • Hedging copper
  • Letting gold ride
  • The big picture

 

It's gold week around here at HardAssetsInvestor.com, so let's take a look at a company that pulls the shiny stuff out of the ground. It happens to be one of the biggest players in this space, and it happens to have reported earnings this past Friday: Barrick Gold Corp (NYSE: ABX).

Why look at a gold company if you are a commodity investor? It all depends on how you like to play. There are advantages and disadvantages to pick-and-shovel plays - we discussed some of them in Gold Vs. Miners back in October.

One of the interesting ratios we looked at was the price of gold compared with the value of the Amex Gold Miners Index (GDM). While this is an invented ratio, it's worth tracking over time. Back in October, the ratio of the price of gold to the value of the Amex Gold Miners Index was above 1.5 - a high number, historically, implying that gold miners were cheaper than they'd been in years. In October, gold prices were in the $750 range, and the Amex Gold Miners Index was sitting around 500.

The picture has changed a bit now.

 

Gold Price/AMEX Gold Miners (GDM)

 

 

The ratio is currently playing much closer to 1-to-1. Even though gold has climbed to $1,000/ounce, gold companies' stock prices have risen too - sending the GDM climbing to similar levels.

 

Barrick Gold Corp

With that in mind, let's look at Barrick.

 

Barrick Gold (ABX)

 

Like many stocks (in many sectors of the economy), Barrick has had tremendous swings of late.

After big drop-offs in June, August and September, the stock bounced back a healthy 78.4% from the low of $18.14 it hit on October 27, 2008. But even with the jump, Wednesday's closing price of $32.36 is still almost 40% lower than its 52-week high of $53.55. And that downward spiral you see at the end of the chart? That's just Barrick dropping along with the rest of the market at the start of this week.

Last Friday, Barrick announced earnings that beat analyst estimates by 1 to 2 cents a share (depending on who you look at - Reuters or Bloomberg). That "beat" is dwarfed by one-time charges, which pulled the fourth-quarter results into the loss column.

The reason behind the beat is more complex than just pricey gold. Remember, Barrick Gold Corp. is not a pure gold play - no matter what its name says. It does do the majority of its business in gold, but it also plays in the industrial metal markets with its copper production.

Perhaps more importantly, Barrick employs a disparate hedging strategy. It eschews gold hedges, but does hedge copper as well as other nongold assets, such as oil and currency (Australian dollar).

Since Barrick does not hedge its gold, one would expect to see its stock performance closely mirror that of spot gold - at least to some degree. And usually, it has.

 

Barrick vs. Gold

 

But look at what has happened recently. Beyond the stock price taking a larger hit than gold, we can see points of divergence - specifically in the recent past. At the tail end of the chart above, spot gold rose, but Barrick's stock fell. It's a similar pattern, in abstraction, to what's happened throughout down cycles in the last year. Whenever stocks take a serious plunge, Barrick goes with them, while gold itself stays relatively strong in comparison. Classic safe-haven behavior, but still, obvious high correlations to gold.

Compare that to copper:

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