Industry
Barrick Gold Corporation is the gold industry leader that was founded in 1983 by Peter Munk. It is the largest company in the industry with 27 mines worldwide. It became the largest gold producer after acquiring Placer Dome in 2006. Barrick Gold Corporation is one of the three major players in the industry with accumulated 2008 sales of $7,913.00 millions, employed 16,300 employees in 2008, and had a market cap of $36 billion. The other two largest players in the industry are Newmont Mining and AngloGold Ashanti. Newmont Mining accumulated 2008 sales of $1,699.00 millions, employed 15,450 employees, and had a market cap of $12 billion making this company the second largest gold producer in the world by ounces produced. AngloGold Ashanti accumulated 2008 sales of $3,730.00 millions, employed 62,895 employees, and had a $21 billion market cap making this company the third largest gold producer in the world. Other major competitors are Agnico-Eagle Mines Ltd., Yamana Gold Inc., Gold Fields Ltd., RandGold Resources Ltd., Harmony Gold Mining Co. Ltd., IAMGOLD Corp., Kinross Gold Corp., and Lihir Gold Ltd. with market caps ranging from $2.4-12 billion.
Most of the gold producing companies have been chewing on a fat piece of cake since 2001 due to rapidly rising gold prices. In 2001 one ounce of gold cost $271 and over $1,100 today. This month alone, gold jumped 12%. However, these profits will not be sustained by most companies for five reasons – rising labour cost, rising energy cost, rising raw material cost, depletion of natural gold reserves, and loss of operations due to environment damage. Gold is a scarce resource meaning that the more gold is dug out of the ground, the harder it is to find more gold. Technology has dramatically increased in the beginning of the century which made it much easier to find gold and gold producers were living the good life. But after extracting billions of ounces of gold, its quantity began to decrease. This forced companies to search for gold in areas where mining is prohibited, raising environmental and political issues along with pricy lawsuits. This further increased the operational expense of gold mining. The second largest gold producing company in the world, Newmont Mining Corporation, is currently depleting its resources by 10 ounces per minute without discovering new reserves as large as it used to.
Companies’ desperate attempts to increase profits despite increasing operating costs forced them to spend less money on environment preservation, which resulted and continues to result in colossal environment damages. Tons of heavy metals such as cyanide and mercury are deposited into the environment annually as a result of spills during the gold mining process. Cyanide and Mercury increase gold production rates but both of them are incredibly poisonous to humans, animals, and the entire surrounding environment.
One of the reasons why Barrick Gold is considered an industry leader in gold and the rare metal industry is due to their immense financial strength. In the following section, we will scrutinize their financial statements and discuss key elements such as liquidity, solvency, and leverage as part of our data analysis to understand their performance trends. Our analysis will also include comparisons to other notable gold mining companies such as Goldcorp Inc. and Newmont Mining Corp. (SEE APPENDIX)
Liquidity
After analyzing the company we have discovered that the liquidity of the company has marginally deteriorated over the years. The current ratio (2.23, 3.32 and 2.59 in 2008, 2007, and 2006 respectively) and quick ratio (1.49, 2.42 and 2.07 in 2008, 2007 and 2006 respectively) are both decreasing indicating that the company is losing its ability to meet its short term obligations. This is the result of decreasing current assets (loss of cash and highly liquid cash equivalents) and increasing current liabilities (mainly notes payable and accounts payable). Although this may seem worrying, Barrick seems to be allocating lots of capital (generated through day-to-day operations as reflected in increasing cash from operations) towards its investing expenditures. Examples of heavy investing includes the initiation and construction of three new mines (Buzwagi, Cortez Hills, Pueblo Viejo) with potential gold reserves of 3 million ounces a year. Aside from that, cash from operations is influenced by market prices for commodities. In the following years, if copper prices are to remain the same, the company’s cash from operations will reduce, but Barrick hopes to offset this loss by increasing gold production.
Solvency & Leverage
With regards to their solvency and the ability to meet long term obligations, Barrick has been relatively stable as indicated through their debt-to-equity ratios (0.51 in 2006, 0.44 in 2007, and 0.58 in 2008). This is certainly a good sign because, at a time when both short and long term investments are increasing, Barrick has managed to retain their liabilities to reasonable levels. This is also a further reinforcement of their strategy of pumping as much cash (mainly from income and equity) for their investments. Interest coverage is another interesting point to consider. According to the financial statements, the interest coverage ratio has increased drastically in 2009 (15.71, 13.92, and 66.48 in 2006, 2007, and 2008 respectively). This hike would be reflective of their improved ability to pay interest (the cost of borrowing), but the actual interest incurred has remained quite stable over the years (Annual Report, p.52). The main difference is that Barrick has increased the proportion of interest costs that it capitalizes within their property, plant, and equipment (PP&E).
Barrick, being the largest gold producer on the planet, also uses its inventory and mines as a form of leverage. Due to the current financial turmoil, gold prices are at record highs and expected to appreciate even further as investors demand more gold (a safe haven) to hedge against capital losses. The increasing cash flows and inventory values, as a result, presented Barrick with an exceptional chance to attract investors as well as issue debt to support the creation of mines to increase their gold production. Barrick thus promised high returns to their investors through expectations of rising gold prices to mitigate any potential risks.
Performance Evaluation
Adopting the perspective of an investor, we can look for several different financial ratios to evaluate their overall performance. The first ratio that we would examine is the earnings per share (EPS). Barrick’s EPS have been decreasing over the last three years (1.79, 1.29, and 0.90 in 2006, 2007, and 2008 respectively). This worrying ratio is the result of a sharp decrease in net income due to the financial crisis, coupled with the issuance of more shares in 2009. That being said, Barrick doesn’t seem to have a material enough difference between their basic and diluted EPS. This ensures that there is a very low risk of dilution because there are not a lot of dilutive hybrid securities that could be exercised. Another effect of decreased net income is the decline in the profit margin over the three years. Barrick’s gross margin, on the other hand, has been quite consistent at the 0.5 mark. This tells us that although revenue is steadily increasing, the direct unit costs for generating that revenue have been increasing proportionally to a level where cost of sales (value of mined gold) is half the revenue. The underlying reason for seeing diminishing profit margin with a consistent gross margin is the increase in write-downs and impairment of assets and investments, along with higher development expenses and amortization.
A very important indicator to consider when evaluating the performance of a company is how efficient it is. Barrick’s efficiency in using its equity to generate income has been declining since it has generated about $0.17 of income for every dollar of equity in 2006 versus on $0.05 in 2008. Their assets’ capability for generating revenue has also decreased from 0.11 in 2006 to 0.03 in 2008. The reason for such low returns on equity and asset is the inherent nature of the mining industry. Barrick requires the expenditure of large amounts of capital to finance expansion (which it is doing now for the three new mines), essentially decreasing returns in the present with the expectation of seeing increases in the future.
As far as dividends are concerned, Barrick is considered a safe bet because of the increasing demand for gold, along with potential rise of its future gold reserves. The positive trend is emphasized through the increases in the dividend pay-out ratio; 0.13, 0.23, and 0.44 in 2006, 2007, and 2008 indicating higher proportions of net income paid to shareholders. Barrick proves to be a great investment because, despite the economic downturn and decreasing net income, they have still managed to increase the dividends per share every year (11¢ in 2006, 15¢ in 2007, 20¢ in 2008, and 40¢ in 2009) due to its immensely positive future outlook. The increase in dividend payouts also portrays the company’s confidence in their cash flow, because although cash balance is decreasing, the main reason is the outflow towards capital investments.
Industry Comparison
In comparison to the industry, Barrick has the only ‘A’ rated balance sheet, which illustrates the company’s low risk. Additionally, Barrick is quite stable because it has the largest market capital, gold reserves and production. All companies in this industry have seen decreasing levels of cash due to large increases in capital expenditure. In addition, the current ratio has decreased over the past few years for all three companies indicating a trend of poorer liquidity in the industry. However, companies seem to be different with regards to their solvency and leverage. For example, Goldcorp has seen decreasing levels of debt to equity while Newmont’s have almost doubled since 2005. Despite variable trends, most gold companies are consistently providing stable dividends as they still continue to see net income on their statements rather than net losses, despite the deep financial crisis. Goldcorp, especially, have seen their income increase by as much as $1 billion in 2009.
IFRS CONVERSION
Barrick Gold Corporation has taken a few major steps in order to implement IFRS. One of the steps that they took is completing an initial assessment of the merits of a potential conversion to IFRS. During the third quarter of 2008, they decided to convert to IFRS. They began filing the financial statements under IFRS in the fiscal year of 2011 that would be consistent with their other Canadian issuers. This is to improve the comparability of their financial statements with their gold mining companies. Since converting to IFRS is a huge change in a company, they employed a team for IFRS conversion in early 2009. The IFRS conversion is going to affect many things in the company such as:
- Reported financial statements and results of operations
- Internal controls and procedures over financial statements
- Information technology and data systems
- Disclosure controls and procedures
- Current financial reporting training curriculum
- Downstream business activities
To address these issues, the IFRS team is going to be responsible for preparing their detailed plan for IFRS conversion. They are planning of completing this plan by the end of first quarter of 2009. They have been doing a technical analysis of the accounting differences in the financial statements prepared following the US GAAP and IFRS, which they are planning to complete by the third quarter of 2009. The company, Barrick Gold Corporation, has informed their current shareholders about the changes that they will go through for changing to IFRS in the notes of their annual report. They also have an IFRS team, which will constantly be monitoring the IFRS accounting developments over the years and update the conversion plan as well as the public disclosure of IFRS.