Barrick Gold’s brave (and scary) new world – by David Milstead (Globe and Mail – September 21, 2013)

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The buzzword at Barrick Gold Corp. is governance, as the miner responds to unhappy shareholders by adding new members to its board and revising its pay practices for key executives.

The changes that may make the biggest difference to its survival, however, are occurring at the Toronto-based company’s mines. During the past few months, Barrick has cut its head count and deferred capital spending. It has also slashed its dividend as the price of gold has slumped.

As the most debt-heavy miner in the industry, Barrick has the most to lose as gold prices decline. It also has the most to gain as gold prices rise, which may explain why the shares are now near $20, up about 40 per cent from their weakest points earlier this year, as gold has bounced off its recent lows.

Investors who choose Barrick as a means of playing a gold rebound, however, could be in for a long, painful slog if the metal’s price languishes.

“In the current environment, they’ve really taken it on the chin,” says analyst Adam Graf of Cowen and Co. “You have to ask yourself if the stock price has fallen off enough to make it attractive and how vulnerable the stock is if gold were to move lower. I don’t think Barrick has [declined] enough to say the strong leverage it has to the upside more than offsets the risk to the downside.”

The one thing that is certain is that Barrick shares are a great choice for those with strong views on gold. With nearly $14-billion of borrowings, Barrick has more debt than any other major gold miner. When a company uses a greater proportion of debt, its shares have more room to gain when sales and profits grow.

Of course, the opposite is also true. An analysis by Toronto investors West Face Capital, obtained by The Globe and Mail, suggests Barrick shares have a value of less than $10 at current gold spot prices and have negative value at gold prices below $1,150 (U.S.) per ounce.

Any financial projection, however, depends on the assumptions that go into it. And some analysts see hope for Barrick.

Jorge Beristain, an analyst at Deutsche Bank, cut his ratings on the miners in April as gold prices fell. He expressed some of his deepest pessimism about Barrick, saying that a $1,300-per-ounce gold price could force Barrick to raise $2-billion (Canadian) to $4-billion in a stock sale, a move that would massively dilute the company’s shareholders.

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