Soros Doubles Stake in Barrick Gold
George Soros, founder of the $4.5-billion Soros Fund Management LLC, and the 22nd richest person in the world, isn’t quite so sure that President-elect Donald Trump can make America great again. In fact, it appears as though Soros is betting that Trump won’t.
After selling most of his holding (94%) in Barrick Gold Corporation (NYSE:ABX) in the second quarter, George Soros has since doubled his stake in the gold miner, purchasing 1.78 million shares in Barrick, the largest gold mining company in the world, in the third quarter. This takes the fund’s total holdings to 2.85 million, worth $44.17 million. (Source: “Soros More Than Doubles Stake in Barrick Gold,” Bloomberg, November 14, 2016.)
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You can’t really blame Soros for selling off his stake in Barrick Gold after the stock experienced its best first-half-year performance ever. In July, the company’s share price was up 157% year-to-date.
His timing was perfect. Since hitting a 52-week high of $23.44 in July, Barrick’s share price has been steadily falling, down approximately 32%, at $15.50. Barrick Gold’s share price fell as safe-haven investors looked to park their money elsewhere as the prospect of rising U.S. interest rates increased. In fact, the odds of a December rate hike are nearing 100%.
Gold prices plunged following the U.S. election because Trump promised that he would cut corporate taxes and increase infrastructure spending ($550.0 billion). This will increase the country’s ballooning deficit, which has the added effect of increased yields. This makes non-interest investments like gold less appealing.
Barrick Gold Tops Analyst’s Expectations
Why did Soros more than double his stake in Barrick Gold? Barrick announced steps to cut costs and sell assets in an effort to lower its debt. The company also reported solid third-quarter results which topped analyst’s estimates. (Source: “Barrick Reports Third Quarter 2016 Results,” Barrick Gold Corporation, October 26, 2016.)
Third-quarter earnings came in at $175.0 million, or $0.15 per share. In the third quarter of 2015, Barrick reported a loss of $265.0 million, or $0.23 per share. The company’s third-quarter free cash flow was $674.0 million; the sixth consecutive quarter of positive free cash flow.
Third-quarter gold production was 1.38 million ounces, with all-in-sustaining costs of $704.00 per ounce. In the third quarter of 2015, gold production was 1.66 million ounces, with all-in sustaining costs of $771.00 per ounce.
The company’s total debt was reduced by $1.4 billion year-to-date, and Barrick remains on track to achieve its $2.0-billion debt reduction target for 2016. Thanks to the company’s stronger balance sheet, it will be better able to withstand ongoing volatility with gold prices. It also allows the company to invest in its business and grow its free cash flow.
Gold’s Long-Term Appeal Is Robust
Gold prices may be retracing in light of a Trump election victory, but the long-term outlook for bullion remains strong. Now that the post-election Trump hangover is ending, the Dow Jones Industrial Average (DJIA) is taking a breather as investors digest what a Trump presidency will look like.
Bill Gross, the billionaire manager of the $1.6-billion Janus Global Unconstrained Bond Fund, does not believe there will be a new Trump bull market because “The Donald’s” growth plan is effectively flawed. Gross maintains that Trump’s plan to reduce taxes and increase infrastructure spending will not increase economic growth (or equities). (Source: “Gross Sees ‘No New Trump Bull Market,’ Says Growth Plan Flawed,” Bloomberg, November 16, 2016.)
Higher deficits, which result from lower taxes, raise interest rates and inflation, which has the potential to reduce earnings and price-earnings (P/E) ratios. This does not bode well for an overvalued stock market which only recently came out of the longest earnings recession on record.
Investors are in for a bumpy ride in 2017, not unlike the roller-coaster ride that has, so far, marked 2016. This will continue to make gold-mining stocks like Barrick Gold an excellent opportunity for investors in the coming year.
