When you're one of the largest firms in your industry like Barrick Gold (ABX) is, there are clear benefits and drawbacks. When the market is down, a leading firm like Barrick is often hit hardest. To the same token, when the market is hot, the company enjoys some of the most impressive returns in the sector.
Canadian Mining Rebirth
Fortunately for Barrick and its peers, the precious metals trade has recovered significantly thus far in 2016. This has particularly been a boon for Canada, whose economy relies fairly heavily upon its resource extraction industry. Over the first five-plus months of this year, Canada's miners have (as a group) actually outperformed the country's benchmark Toronto Stock Exchange (TSX) as well as the prestigious London Metals Exchange (LME).
Barrick ranks as not only Canada's biggest gold miner but also is world's largest gold miner by market cap ($19 billion). It's not just gold that's fueled the rally, either: copper has turned around for 4% year-to-date gains while zinc has advanced 14%. Thanks to being at the top of this food chain, Barrick has seen its stock price more than double so far this year.
Following this surge for the mining sector, many expect to see renewed investor optimism regarding holding mining stocks, which are traditionally fraught with volatility and risk. This is especially relevant in comparison to the limited upside for the bond market.
Sale To Regret?
Before 2016's much-needed turnaround in the mining industry, Canadian firms were active in improving their financial system during the bull market. One of the key strategies used during this period was the sale of non-core assets that weren't essential to the company's business.
Although it was sold as part of the process described above, the Kainantu project may be one asset that Barrick regrets letting go of. Located in mineral-rich Papua New Guinea, the mine was purchased last year by K92 Mining for a relatively paltry $2 million. (Barrick originally purchased the project in 2007 for over $140 million.) Barrick could potentially receive as much as $60 million in future "earn-out" payments if the project is very successful for K92.
The big advantage to the acquisition for K92 is that it is expected to be extremely low-cost to get operations started. Barrick poured money into Kainantu while it was in "care & maintenance" mode from 2008-2014 while nearby deposits were explored, meaning extraction is an immediate possibility and various options for starting points are available.
K92 is slated to receive a listing on the Toronto Stock Exchange (TSX) tomorrow with the symbol KNT. Although the company only has a market cap of $47 million, decidedly making it a "small cap" miner, analysts point out a pair of reasons to be confident in the firm. Not only does it have the advantage of Barrick already taking care of much of the capex (capital expenditures) it would have to incur to get the project off the ground, but it also boasts a diverse and experienced team of executives.
Despite gold prices dropping slightly on Wednesday, shares of ABX rose another 2.25% during trading.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.