IKN

Gold
miners are real companies too

As I put together my thoughts on
the deal done by Goldcorp (GG) this week to buy half of Cerro Casale and all of
Caspiche (see ‘Producer basket’ below) I got to thinking about the way these
tier one stocks are being run at the moment. The big turnaround story of the
sector is, of course, Barrick (ABX), which has managed to pull back from the precipice
since ex-GS-orthodox-capitalist Thornton took over from
gold-prospector-hit-it-big Munk and the decision was made to run ABX like a
normal company instead of applying the crazy pretzel logic that seems to prevail
in the sector.

The difference at ABX has been its
new, hard-nosed attitude towards the balance sheet and particularly to its debt
position. In the 2009 to 2011 period Munk added nearly U$12Bn to the company’s
liabilities, most of that as straight financial debt. Which is all well and
good if the gold bull goes on forever, but what we now know is that the party
came to a shuddering halt in 2013 and left ABX staring down the barrel of real
financial problems. And that’s what has made ABX under Thornton the big
turnaround success; he’s sold fixed assets, hacked down the debt and plans to
continue to do so in the next two financial years (another U$2.4Bn or so to
come off the debt in order to get it down to U$5Bn, he says).

What with the Garofalo decision last
week to follow the samo samo route of mining companies and buy mediocre assets
with real money, I got to thinking about the two companies and compared their
balance sheets over the important recent period. There are plenty of interesting
comparisons that show up and we could take a lot of space to chew them over,
but the crux is in two datasets comparing the crisis year end of 2013 to the
end-of-tunnel year end of 2016:

• In the period end 2013 to end 2016, Goldcorp increased
  its financial debt by U$1.0Bn
• In the period end 2013 to end 2016, Barrick reduced
  its financial debt by U$5.1Bn

• At end 2013 Goldcorp had a market cap of U$17.1Bn. Today
  its market cap is U$14.6Bn
• At end 2013 Barrick had a market cap of U$18.1Bn.
  Today its market cap is U$19.0Bn

In a nutshell, the decision by
Thornton to treat ABX as a normal company that needs to show financial
discipline and balance sheet strength has seen the market cap of the company
under his charge increase by close to a billion from the start of the slump to
the end of the tunnel. However the collective decisions of Telfer and Garofalo,
prizing gold ounces and project collection over basic financial well-being have
seen GG’s market cap (aka “the sliver of hope that lies between assets and
liabilities”) drop by over U$2.5Bn.

The decision last week by GG to buy
into Cerro Casale, plus the stated intention of ABX to keep reducing its
financial debt by selling fixed assets (and apparently the next deal is close
to hand) show that the trends we saw in both companies in 2013 to 2016 are only
set to continue. In other words, one of these companies is doing it the
old-school way, betting on projects and hoping gold prices makes it look smart
later. Meanwhile, the other company is being run well.