Dateline: 05/10/99
On Friday morning the Bank of England announced its plans to sell 415 tonnes of its gold reserves. The price of gold proceeded to shed $7 amid loud wailing and gnashing of teeth on the part of gold bugs. "Those beastly Poms!" they cried.
But as I wrote in my column of April 21 on the Swiss plan to sever the relationship between the Swiss franc and gold, "gold will not budge in price as long as any gold continues to be held by central banks".
That may seem like a bold statement, but essentially, that has been the history of the last two years. So is gold dead? Is there no room for judicious investments in the precious metal? Actually there is. But it is not in bullion. It is in selected gold mining stocks. And Barrick Gold is the best of the best.
Last Tuesday at its annual general meeting, gold mining giant Barrick Gold Corporation celebrated the best quarterly results in its 17 year history. An impressive net income of $87 million (all figures in US dollars) on revenue of $392 million. This beat the corresponding 1998 First Quarter figures of net income of $75 million on $305 million of revenue. As new Barrick President and CEO Randall Oliphant put it, "Barrick has never been stronger or better positioned to grow. Across the board, we set records - in earnings, cash flow, production, and costs".
There are two factors in the profit/loss equation for any industry - revenues and expenses. Although the price of gold has been in the toilet for well over a year, gold miners continue to lower the cost of production. Barrick's average cost for the past quarter was $116 an ounce. With gold at $280, this is a gross margin of 58.6%. That is a healthy margin indeed!
How much have production costs dropped? The company reports it expects to produce 3.6 million ounces this year at an average cost of $125 compared to an average cost in 1998 of $160. That's a 22% drop in cost.
Barrick has strategically sold its gold at a premium to the market price for the last eleven years through forward selling. During the last two years it has phased out high cost mines and focused on low cost production. As a result, although "Barrick produces 5% of the world's production, it accounts for 20% of the world market value and 40% of market trading for gold companies"
But while it has phased out high cost mines, it has not been idle in the exploration department. Exciting developments continue in Nevada, Peru and Tanzania. In fact, Barrick owns five of the top ten gold deposits in the world today.
The key to Barrick's success is their philosphy, expressed well by Oliphant. They don't whine about the low gold price. "We control our own destiny, rather than wait passively for good luck".
The company is, of course, concerened about the low gold price and the "enormous amount of negativism" this engenders, but founder and chairman Peter Munk believes this negativism has already been discounted and "Barrick, whether gold prices go up or down, will prosper".
Here's a quick fact sheet on Barrick's financial position:
| First Quarter 1999 | First Quarter 1998 | |
| Revenue | $392 million | $305 million |
| Net Income | $87 million | $75 million |
| Production Cost | $116/ounce | $160/ounce |
| Cash Flow | $210 million | $134.6 million |
| Cash Position | $416 million (12/31/98) | $292 million (12/31/97) |
Barrick has the strongest balance sheet of any gold company and is the only one with an "A" credit rating. Although it has a $500 million long term debt, its cash position improved in the first quarter of 1999 to over $500 million, giving it no net debt. It has financed all expansion out of cash flow without adding debt. And Barrick's cash position will continue to strengthen as its debt repayment isn't scheduled to begin until 2007.
The negativism surrounding gold has adversely affected share price despite Barrick's solid track record. But as Oliphant puts it, "Companies that generate consistent growth in earnings and cash flow will ultimately have that value recognized in their share price, regardless of their industry".
Prior to the Bank of England's bombshells on Friday Barrick Gold had risen from $30.70 on Monday to $33.80 on Thursday. It crashed back to $29.90 at Friday's close - a bargain for astute buyers.
Annual General Meeting - on Real Video with slide show or on Real Audio or selected texts of speeches.
Five Year Track Record - some highlights of Barrick's five year track record.
Barrick Untarnished by Flagging Gold Price - National Post account of the AGM.
The Privateer's Gold Commentary - Bill Buckler is the leading proponent of the view that there is a conspiracy to keep the price of gold down. He may well be right!
Disclosure:: The author has no interest in Barrick Gold - yet! I may buy some today.
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