The Ormetal Report

April 25, 1997

Barrick and the TSGI, getting cheap..!

Future gold prices are without any doubt the most important influence on the future of senior producers stock prices. Gold has been in a bear market since February 1996 and so have been the senior producers like Barrick Gold and Newmont Mining.

As you know, gold producers are leveraged to the price of gold. When gold goes up 10%-20%, stocks move up by 30%-100% and the same is true when gold goes down as the leverage works in reverse. So it may be interesting to see where the stocks are right now on the valuation scale in relation to gold. This might give an indication on when the bottom in gold stocks and eventually gold may come.

The best way to do that is to examine the market capitalizations of gold stocks at recent market bottoms and compare them to their main assets, gold reserves. It is no small analysis to do this exercise on all senior stocks, so I will concentrate on Barrick Gold Corporation which is the most representative of all, as it makes up for 35% of the XAUand 32% of the TSGI (Toronto Silver and Gold Index). Barrick Gold is a Canadian corporation and I am a Canadian, so I hope you will allow me to use the Canadian dollar as the measurement currency.

The previous two lows in Barrick Gold and gold where not perfectly synchronized. Still, by looking at a chart, it is fairly easy to come up with December 1992 and December 1994 as the immediate two previous lows that we should examine. So let's work with these dates - and first compute the Barrick Gold market capitalization on those dates:

 

Barrick Gold Corporation 1992 1994 Now
Shares outstanding (millions)
Stock price   ($C)
Market capitalization   ($C millions)
285
17.19
4,899
353
28.25
9,972
370
30.80
11,396

Next, we need to know the gold reserves of Barrick Gold on the various dates. We normally use the proven and probable gold reserves in millions of ounces. Dividing the market capitalization into the number of ounces will give us a dollar per ounce figure that will indicate the value the market is giving to Barrick Gold for each ounce of gold it has in its inventory.

Barrick Gold Corporation 1992 1994 Now
Market capitalization   ($C millions)
Proven and probable ounces (millions)
4,899
25.7
9,972
37.6
11,396
51
Market value per ounce   ($C)
Canadian dollar
Market value per ounce   ($US)
191
.793
151
265
.713
189
223
.713
159

It is interesting to note that, on a per ounce basis, Barrick Gold is now almost 15% cheaper than it was in December 1994, even though the current stock price is higher than in 1994. It is now valued at C$223 per ounce in the ground versus C$265 in 1994. Indeed, Barrick Gold has been growing in the last 5 years, adding to reserves. We are also a mere 17% more expensive than at the low of 1992. In $US, Barrick Gold is now almost as cheap as it was in December 1992. Of course, you will say that the drop of the $C in the past 5 years makes Barrick Gold look cheaper than it is in reality. But remember that the $C was above US$0.75 just a few months ago, so I would dismiss the importance of this currency fluctuation in light of the $C great volatility.

Now let's include another variable in this equation: possible reserves. Although they are not guaranteed to become proven, possible reserves are over time usually converted in part to the highest category, and are considered by analysts as an indication of the future growth of the company. Some of these reserves are therefore reflected in the value assigned by the market. Adding these low category reserves to the number of ounces paints a new picture.

Barrick Gold Corporation 1992 1994 Now
Market capitalization   ($C millions)
Proven, probable and possible ounces (M)
4,899
27
9,972
44
11,396
76
Market value per ounce (all categories - $C)
Canadian dollar
Market value per ounce (all categories - $US)
181
.793
143
227
.713
162
150
.713
107

Does Barrick look like a real bargain based on this US$107 market value per ounce ?

Is Barrick Gold bottoming?

The chances are good that the end of the bear is approaching. At least, we can say that Barrick Gold, and most certainly all other seniors, are close to reaching the low end of the valuation scale in terms of market value per ounce.

Look at the chart of Newmont Mining, Placer Dome and others. They are making new lows on a market value per ounce basis. These are the main components of the XAU. So unless gold goes down much below its 1993 low, the seniors, the TSGI and the XAU are bottoming.

This prompts me to comment on a traditional ratio that has been used to measure the valuation of the gold market, the XAU/Gold ratio. Because of the normal expansion of the gold reserves of one or more components of the XAU, it is always dangerous to use the ratio as a guide to forecast future stock prices. This ratio must continuously be reviewed in light of the growth of the total gold reserves of the XAU's components. Of course, you will say that market capitalizations expand as well as gold reserves. But, as you can see with Barrick Gold, gold reserves can grow much faster.

Gold is still being mined and refined at the rate of almost 2,600 tonnes per year.

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