However, investors should note that some analysts, such as Oppenheimer’s Carter Worth, believe that the situation couldn’t get any worse, which is why companies such as Barrick Gold Corporation (USA) (NYSE:ABX) and Newmont Mining Corp (NYSE:NEM) are attractive and represent a significant upside.
However, I believe that there is a lot of uncertainty in the industry coming from falling gold prices, high debt levels, and divestment. In Barrick’s case, we need more information about how the company is managing its debt and asset sales — which would come in its next earnings release in October.
Then there is the threat of more write-downs which could significantly damage earnings. Following Barrick’s massive $5 billion hit, Jefferies has identified that Newmont Mining and the South African mining giant Gold Fields Limited (ADR) (NYSE:GFI) may be next.
Meanwhile, shares of gold miners have tanked this year. Since January, Barrick Gold Corporation (USA) (NYSE:ABX) has dropped 55%, Newmont Mining Corp (NYSE:NEM) is down 33%, while the Market Vectors Gold Miners ETF has dropped 45%.
Conclusion
Therefore, due to the volatility in gold prices, high debt levels, a possible downgrade in credit ratings, and potential write-downs, I believe that these firms haven’t touched bottom yet and I believe that the outlook for both Barrick Gold and Newmont Mining is negative. The Market Vectors Gold Miners ETF isn’t any better. In fact, Barrick Gold and Newmont Mining Corp (NYSE:NEM) are its second and third-biggest holdings with a total weight of 20.3%. Add Gold Fields to the equation, the tenth largest holding in the fund, and you have an ETF whose at least 25% of net assets — represented by these three companies — are on Jefferies’ write down radar.
Barrick Gold is now stuck with a mine which is now looking less lucrative than before due to not only financial, but political challenges as well. Investors should also note that the write-down story for Barrick Gold with a $5 billion post tax charge is not over yet. Besides, Newmont Mining and Gold Fields, analysts from TD Securities have pointed out that total impairment charges of $10 billion could be in the making. Remember Barrick’s poorly timed copper acquisition of Equinox Minerals mentioned earlier? That still carries goodwill of $3.5 billion which could evaporate in the coming quarters.
Therefore, due to high debt levels, increasing likelihood of a ratings downgrade, and expectations of further write downs on the back of tumbling gold prices, I believe that Barrick Gold, Newmont Mining, and the Market Vectors Gold Miners ETF haven’t bottomed yet. Their shares would remain under pressure and any of these bad news would send their stock even lower.
The article Can Gold Miners Drop Even Further? originally appeared on Fool.com and is written by Sarfaraz Khan.
Sarfaraz Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Sarfaraz is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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