Wednesday, 17 April 2013

Portfolio Buy: African Barrick Gold (LSE:ABG)

Gold Finger?
Source
Gold is in the news currently, following a sharp drop in the gold price that surprised the market.

As a DIY Income Investor, holding gold does not appeal as I expect my investments to 'pay for their keep' by returning an income. Gold just sits there, looking shiny but incurring holding costs - but there's no doubt that it has been a stand-out speculation investment over the past few years.

So, I have been on the look-out for a gold mining share that pays a good dividend; the problem is - most don't. Until now...

African Barrick Gold (LSE:ABG) - one of the FTSE 250 - was spun out of Canadian Barrick Gold Corp., the world's largest gold miner, with an IPO in 2010. ABG is Tanzania’s largest gold producer and one of the five largest gold producers in Africa. It has four producing mines, all located in Northwest Tanzania, and several exploration projects at various stages of development in Tanzania and Kenya.

ABG currently has a yield of 5.9% with a dividend cover of 1.6. But to paraphrase: 'With great yield comes great risk'.

The share price has fallen by over half in the last year, on a continued stream of bad news:
  • increased cost of production (this is a relatively expensive source of gold at $949 per ounce sold in 2012 versus $692 in the previous year)
  • increased royalty payments to the Government
  • lack of reliable power infrastructure
  • loss of long-term employees due to pension changes
  • declining reserves
  • failed sale to the Chinese
  • big impairment charge
  • etc.

The more you look at the more depressing it seems - but that is why the yield is so high.

So, what redeeming factors does it have?

First, the dividend has been confirmed and this dividend is paid in US$ (helping to diversify currency risks for a UK investor). As the 2012 Annual Report notes: 'While our operational and financial performance in 2012 has been lower than the previous year, we recognise the importance of rewarding ongoing support from our shareholder base. For this reason, the Board has recommended that the total dividend for 2012 be maintained at the 2011 level ..."

When you consider that 74% of the shareholders are (were?) Barrick Gold, you understand why.

Second, this is a big operation with potential - it just needs some focus and pro-active management to drag this underperforming business out of the spoil heap. A plan is being hatched, we are told. The reason this was not done before is probably that Barrick thought they could unload the lot on the Chinese.

I'm not really a 'price chart' investor but you shouldn't ignore the trends. The 5-year Sterling price chart shows a steady decline, accelerating noticeable in 2013. There was recently a 5% jump (on a favorable broker's note) followed by a 5% drop - when I bought: probably too soon but this share goes ex-div on 1 May, so I didn't want to miss that.

So, the key question is: who's doing all the selling at the moment? Yes, gold dropped through the floor, for a day, which spooked the market for gold and gold miners. Then again, this is a serial disappointer. I hope that Barrick are not trying to recover some cash from the market with a selling programme (it seems to have a lot of other problems) - however, given that they didn't drop their price for the Chinese, this seems unlikely.

The main thing is - I now own part of a gold mine! (several really) - yielding nearly 6%! What's not to like!

[Purchase price: £1.80]

Update 6/11/13 - Being a crypto gold bug is ioo stressful! I have sold out at a bit more than my purchase price.


I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

13 comments:

  1. What is your outlook on ABG at the moment I'm surprised by the rapid decline?

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    1. Yes - obviously I haven't bought at the best time. An even higher yield now (assuming the dividend is maintained) indicates an even higher risk!

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    2. I invested at around the same time as you and now thinking of possibly topping up or gambling with centamin(no divi though!I'm going to sit back and watch and maybe invest when it gains some momentum, but with the market being bullish investors seem to be shunning gold...

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    3. Going back up today - maybe oversold?

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  2. I have been watching this since you bought. It continues to struggle and the gold price is not helping. Cost were increasing but management seem to be trying to address this now. It is a good job it has no debt and hopefully this will help in the short term. It could close some operations and or stop divi (ouch!) to bide its time.

    As more go under it might be in a position to pick up some extra assets cheaply. This could be good for the long term but they have to change and survive first.

    As the price continues to fall they could become a "bargain" and yields of 8% now seem great if it continues to pay out. I have seen some suggesting a fall to the 105p area with potentially no yield. I doubt I would buy then without the income.

    This is now a risk/reward call. Remember the banks? I'm still watching and hope that things turn around for you. Remember today is just a snapshot it might be completely different in a few months or years time.

    Plus like you said "You own a gold mine" well a share of anyway.

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  3. Too true! I was thinking about buying some more as an out-and-out gamble.

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  4. Well the share price has hit the 105 mark. Gold is still falling and could fall further (http://seekingalpha.com/article/1515352-gold-falling-prices-not-end-of-the-world)

    So ABG follows the price down but for how much longer? Lots of things are working against this but didn't someone famous say "Be greedy when others are fearful"

    With a yield of some 10% and low PE it sounds attractive and
    this must be getting closer to bargain territory. If it closes down some operations to save cash and rides out the storm with its cash hildings until things pick up hopefully the share price should steady. What is the bottom though? maybe 80p if gold continues to fall! (a better bargain)

    Its still on the watchlist but I may wait for a trading update to see if this is going to start to improve. This is still a high risk. What is your plan from here? Ride it out and collect the divis, wait for it to turn and avg down. I think that it may rise quickly once it starts to move but may become one that you hold a little longer.

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  5. The rate of share price falls has now dropped off. The lows of 94p have bounced back up, sometimes by as much as 20%.

    This still fluctuates by quite a bit on a daily basis. The gold price has also been more settled of late. A 10% divi and out of favor sector, so is it a contrarian value buy or just value trap?

    Management need to get a grip of costs, likely to big write downs and that divi still might be cut. It looks like time to try a nibble but not a main meal. So like you I have just bought a few last week.

    Now awaiting the forthcoming update. If you want something safer might be better to look at RIO.

    Lets hope all the bad news is already out there and that things start to get better from here ........ and that divi (fingers crossed) is maintained. Good Luck.

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  6. The results are now out and as expected there have been write downs on the value of the mines, as the gold price has fallen. Costs have been cut and continue to be so. The intrim divi was reduced to 1cent (4cent) The company also made a loss, mainly due to the write downs and this is based on a gold price of $1300 oz but is producing more.

    Regarding the divi, for income investors this is important, the report states “This demonstrates our commitment to capital returns to shareholders and also represents a sign of our confidence that we will be able to generate significant cost savings from the Operational Review and return the business to positive free cash generation.” So management think things will get better.

    The costs to produce the gold were lower than guidance issued previously and the gold price has risen from its lows and is currently trading above ABG’s trading figures, so it is not all bad news. Not forgetting it has net cash too!

    The share price has fallen from 600p to 100p approx over the last few years and now appears to be rising again from 93p lows. Once the right downs and the cost cutting exercises are complete, this should leave a leaner stronger company that makes a profit even in the lower gold price environment.

    This is all about the future from here though, if the reduced gold price flushes out the weaker companies and overall gold become more difficult to get hold of, then the price will start to rise again as there are still quite a few people/nations that want to buy. I think the company is “less risky” now, post the update as we can see where it is going and how it’s done in the new environment. There are still challenges ahead but it is still paying a divi.

    I know you are already a holder of this stock so may not wish to add more but this might be one of those “moments of opportunity” to get in cheap for investors just starting out. What are your views as a dividend stock now?

    It will be interesting to look back at this in say, 3 years time. I wonder what my comments will be then? “Glad I avoided that” or “I should of piled in whilst it was cheap”.

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    Replies
    1. Great contribution! This particular share pick has been a bit of a disappointment in the short term - but as you say, this might be time to pick up a bit more!

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  7. This is looking like a smart buy now that things have calmed down! Unfortunately I sold out at around £1.80.

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    1. Maybe - but it has been a stressful income share. I sold out some time ago just to get my money back!

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    2. Likewise, I had bought in thinking the price had bottomed out and had a decent dividend but I ended up wrong on both accounts so I sold out. Definitely not one I would consider an income share.

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