Bear of the Day: Barrick Gold (ABX)

I've written about large-cap gold miners like Barrick Gold (ABX) many times over the years for the Bear of the Day feature, and most recently in April right before the company reported earnings that fell in line with analyst estimates.

 

Here's what I wrote on April 18...

 

The steadily eroding earnings outlook for these companies is no surprise, even as the price of gold rallies.

 

Since a summer of 2016 peak for the yellow metal near $1375, it has fallen to support at $1125 and rallied back to $1350.

 

Meanwhile, Barrick Gold shares have fallen over 40% from $23 to $13, and the Market Vectors Gold Miners ETF (GDX) fell 26%.

 

(end of April 18 Bear of the Day excerpt)

 

Since then, ABX has actually held its ground at $13 while its yellow metal has dropped over 8% as US interest rates rise and the dollar has rallied 6%.

 

But analyst EPS estimates for Barrick have fallen over 7% from 83-cents to 77-cents for the full year 2018.

 

And the continuation of this longer-term trend is on full view in the Zacks proprietary Price & Consensus chart...

 

 

What you see is EPS on the left-hand scale with each colored line representing the changes in annual estimates over time.

 

The right hand scale is the stock price, showing a steady decline as earnings growth never really showed up the past two years.

 

The top line isn't much better with this year's expected $7.8 billion revenue haul posting as a 6.7% decline over last year -- and this is down from April's $8.03 billion sales projection for 2018.

 

Current consensus estimates for next year show at least a 3% drop on both the top and bottom lines is expected.

 

The Monetary Myth of the Barbarous Relic

 

The cost of producing an ounce of gold is over $800 for the majority of miners. And one element besides the high cost of production that always hurts the miners is past hedging.

 

If a miner has obligations via futures, options, or OTC forward contracts to sell gold at say $1300, $1200, or even $1100, then rising spot prices don't have the direct margin leverage one would think.

 

And I remain bearish on gold, believing nothing in monetary policy or the inflation outlook will much help it get back to $1500 and above.

 

In October I wrote a special report for Zacks Confidential titled The Monetary Myth of Gold where I explained why the barbarous relic was soon doomed in the high-tech age of fiat currencies, digital finance, and artificial intelligence.

 

Instead, I recommended investors put their money into real economic growth stories like NVIDIA (NVDA), Alibaba (BABA), and Edwards Lifesciences (EW).

 

That report has my detailed thesis on all the dynamics for gold, including the dollar, inflation, and the relativity of currency fluctuations in a global economy. You can email Ultimate@Zacks.com to request a copy.

 

I even suggested that cryptocurrencies like Bitcoin were proving the digital era would offer more important economic innovations to extract than anything we could dig from the ground.

 

Barrick Gold may indeed be worth something near $15 billion but I wouldn't pay that now for cash flow that is headed the wrong direction, and could be for a while.

 

Disclosure: I own shares of NVDA and BABA for Zacks TAZR Trader and shares of EW for Zacks Healthcare Innovators.

 

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