From another board
Citigroup urges Barrick to ‘aggressively’ reduce or repurchase entire gold hedgebook
By: Dorothy Kosich
Posted: '14-FEB-07 08:46' GMT © Mineweb 1997-2006
RENO, NV (Mineweb.com) -- Citigroup metals analysts John H. Hill and Graham Wark urged Barrick to aggressively reduce its hedge book or repurchase the entire hedge book, an action that “could be one of the most compelling re-rating catalysts in the metals industry.”
In an analysis published Monday, Citigroup remained positive on gold due to a mix of supply/demand and macro/monetary catalysts, and expects gold to test $700/oz in the coming months.
The analysts said that Citigroup’s global gold forecast remain unchanged at an average of $700/oz for this year and $750/oz for 2008/09. “We would not be surprised to see a test of the old highs of $850/oz at some point,” he wrote.
Hill said “gold has been resurgent in the +$650/oz range, alternately following the dollar, oil, inflation, geopolitics, and liquidity themes.”
“Key factors include solid physical and fabrication demand, despite higher prices, and net central bank sales likely to undershoot,” he said. “Ultimately, this positive stance is tied to: 1) The vanishingly small size of the gold market; 2) Emergence of motivated Chinese and petrodollar-fuelled Middle Eastern buyers; 3) Absence of aggressive short-sellers in a post-9/11 world; and 4) A series of complex handoffs between fabrication and investment demand.”
Hill suggested that major gold shares “appear positioned to participate, finally” after lagging due to the ‘physical bypass,’ whereby investment flows from Asia and the Middle East have favored the physical metal, while the natural (Western) investors in mining shares have been disinclined due to strong performance in conventional equities and fixed income. Also relevant is ‘Mainstreaming Valuation,’ whereby gold’s new-found respectability and pro-cyclical performance has required the equities to stand up to conventional valuation, resulting in a period of multiples compression.”
Hill advised that two critical changes are working to the advantage of the investors: 1) Newmont and Barrick have finally positioned their assets and cost structures to deliver higher gold prices to bottom-line cash flows, and 2) Multiples have compressed to the point where better cash flows can flow through to share prices.”
Using a “clean slate” approach to metals investing this year, Citigroup said “we believe the best opportunities lie in companies with rock-solid in-ground resource value, in commodities that are out-of-favor and where skepticism runs deep. This list includes Powder River Basin coal, aluminum, and almost certainly the major golds.”
“Based on a favorable gold price outlook, and important changes at the operating and valuation levels, we would be buyers of Newmont Mining and Barrick Gold,” the analysts recommended.
BARRICK, NEWMONT
While Hill and Wark noted that while net production growth is not a realistic objective for Barrick, “improving the overall cost/quality/profile of the assets is. We regard the sell-down at Pueblo Viejo, divestiture of Paddington (Australia), and divestiture of the long-suffering South Deep (South Africa) to be net positives.”
The analysts urged Barrick to “aggressively reduce the hedgebook. …Aggressive de-hedging could benefit Barrick in several ways: 1) Likely driving the gold price higher in the short term, with fabrication demand preventing full retracement; 2) Removing a longstanding barrier to ownership for thematic investors; and 3) Signaling to others that ‘the last bears have thrown in the towel.’”
Barrick’s mark-to-market liability as of December 31st is an estimated negative $4.3 billion. “At the current gold price ($660) we estimate the loss has been expanded to $4.6 billion,” according to the analysts.
“Considering 1) Barrick’s balance sheet could handle a more efficient capital structure; 2) Debt markets remain attractive; 3) A positive gold outlook; 4) Low investor demand for hedged producers, and 5) Barrick’s observable discount to inferior gold mining companies,” Citigroup claimed, “We believe the repurchase of the entire hedgebook could be one of the most compelling re-rating catalysts in the metals industry.”
Citigroup’s positive view on Newmont “is predicated on significant changes to operating management, and a belief that investor expectations have been lowered to the point that the company can finally deliver good news. …While it is not realistic to expect organic growth, on a net basis, for gold miners the size of Newmont, we believe there is ample scope to improve the asset mix and earnings power.”
