Barrick Gold Could Be Worth $35

Could this be the turnaround story of 2014?

| More on:
The Motley Fool

Watching the gold mining industry is like passing a car accident: you can’t help but peek at the wreckage.

Companies are shutting mines left and right. Sagging metal prices have erased billions of dollars in investor capital. And firms are issuing equity just to keep the lights on.

Without a rally in gold prices, the casualties are bound to mount in 2014. But for contrarians that are willing to run into a burning building, there might be some good deals to be picked out of the smouldering ashes.

Barrick Gold (TSX:ABX, NYSE:ABX) is one example. While the company has been plagued by massive writedowns and corporate governance problems, some investors believe the miner is ripped for a shakeup. This could unlock a lot of value for shareholders in the New Year.

The only gold miner to own now
Let’s not kid ourselves here. The fundamentals are Barrick are terrible.

In the past year the company has been forced to write off billions of dollars in assets, slash its dividend 75%, and lay off 30% of its corporate staff.

The company’s operations have been in shambles. Construction at Barrick’s flagship Pascua Lama mine, which straddles the border between Chile and Argentina, was suspended after long delays and going over budget. And billions of dollars in shareholder capital was flushed down the toilet during the firm’s disastrous attempt to expand into base metals.

To top it all off Barrick’s management team has been richy compensated for this poor performance. This was highlighted last year when incoming Chairman John Thornton was awarded a $17 million signing bonus.

Normally in a situation like this, I’d be running to the exit. But new developments at the troubled miner suggest that the company is changing its ways.

First, new Chief Executive Jamie Sokalsky has promised to cut costs and optimized the company’s portfolio. Last fall Barrick announced plans to sell, scrap, or curb production are its high cost mines. This should free up capital badly needed to pare down debt.

Barrick is also cleaning up its act in the boardroom. Founder and chairman Peter Munk, the quarterback behind the company’s disastrous expansion, plans to resign at the company’s annual shareholder meeting in the spring.

The firm has replaced several board members with new independent directors with actual mining experience. And Barrick has promised to review its compensation practices to better align them with the interests of shareholders.

This company is still a long way from winning back shareholder trust. But it’s a step in the right direction.

This stock could be worth $35
However, Barrick still has the potential to deliver plenty of more gains for shareholders.

In September Two Fish Asset Management, a small U.S. hedge fund, argued that the stock was trading at a discount to peers due to management’s poor capital allocation track record and the company’s conglomerate-like structure.

Fund director J.R. Sauder has been pushing management to spin-off its high-cost mines outside of North and South America, return more capital to shareholders, and refocus operations on a few high-quality properties. If such actions are taken, Mr. Sauder argues the stock could be worth as much as US$45 per share – versus US$19 at the time of this writing.

Of course, plunging metal prices means that those projections are likely optimistic today. However, in December Barron’s estimated the stock could be worth US$35 per share (subscription required) if such actions were taken at current commodity prices.

Foolish bottom line
Management appears to be trying to win back the favour of shareholders. If they deliver, a slimmed down Barrick could deliver serious gains for investors in the New Year.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Disclosure: Robert Baillieul has no positions in any of the stocks mentioned in this article.

More on Investing

edit Woman calculating figures next to a laptop
Bank Stocks

Should You Worry About TD Bank Stock?

Toronto-Dominion Bank (TSX:TD) stock has been caught up in the banking panic, but is it really that risky?

Read more »

Illustration of bull and bear
Dividend Stocks

TFSA Investors: 2 TSX Stocks Set to Thrive in the Next Bull Market

Canadian Tire and another dividend growth play that's getting way too cheap to ignore amid the market's turbulence.

Read more »

Bank sign on traditional europe building facade
Bank Stocks

Passive Income: 3 Bank Stocks With Yields Over 5%

High yield bank stocks like the Canadian Imperial Bank of Commerce (TSX:CM) can provide a lot of passive income.

Read more »

edit Businessman using calculator next to laptop
Dividend Stocks

How I’d Invest $20,000 to Earn Reliable Passive Income Today

If you want to turn up your passive income and total-return strategy, check out these top Canadian stocks for a…

Read more »

edit Close-up Of A Piggybank With Eyeglasses And Calculator On Desk
Stocks for Beginners

Investors: How Do Canadian Bank Stocks Stack Up to U.S. Banks?

Here's why Canadian bank stocks could outperform their US peers.

Read more »

Canadian Dollars
Investing

If You Invested $10,000 in Dollarama Stock 10 Years Ago, This Is How Much You Would Have Today

Dollarama stock has been one of the top investments in Canada over the last decade and continues to have impressive…

Read more »

Electric car being charged
Dividend Stocks

2 Growth Stocks to Buy Before a Big Rally

Despite market volatility persistently plaguing the market, these two TSX stocks might be worth considering right now to prepare for…

Read more »

Increasing yield
Energy Stocks

Buy the Dip: 1 Blue-Chip Energy Stock With a Rising Dividend Yield

Suncor Energy (TSX:SU) stock is approaching deep-value territory, making it a top pick for Canadian value and income investors.

Read more »