Ashley Redmond: I'm Ashley Redmond for Morningstar.ca. And I'm here with Kristoffer Inton.
Kris thanks so much for joining me.
Kristoffer Inton: It's good to be here.
Redmond: Gold prices in 2013 were pretty ugly. I believe that Barrick was down about 46%, and Goldcorp was down around 35%. Overall, not a very good year.
Inton: Right, and really it had to do with gold pricing. What we saw was that at the beginning of 2013 gold prices sat around $1,700 an ounce. By the end of the year it was around $1,200 an ounce. This was driven by a number of things.
[Number one it was] the economy improving and the stock market [performing] as well as it did. It seemed like there was better places to have your money. Number two with the Federal Reserve starting to talk about quantitative easing; there is real fear of rising real interest rates, which is usually fairly bad for gold. And that drove an exit of ETF demand which had been a driver for demand for gold for some time. So you saw a massive liquidation from ETF holders.
On the other hand, what we saw from jewellery demand was that people saw it is a great buying opportunity. Particularly in China and India where there were record gold purchases, so that brought some stability to the bottom end of the price during the year.
Redmond: When we take a look at gold companies right now. I want to know what's your position on Barrick?
Redmond: Barrick recently reported its full-year 2013 earnings and it was actually pretty good. Obviously 2013 was a tough year for Barrick, just like every other gold miner, despite that they were able to meet their guidance for production and in the low end of their cost guidance as well. Looking forward to 2014 things are looking a little better for them.
Production—when considering some portfolio optimization they are doing—is pretty good and the costs are looking better. As well, capital spend should be way down from 2013. Overall, the story for Barrick is that this is a company that was geared for production at high gold prices, but during 2013 they took a lot of steps to change from a production focused company to a cash flow focused company.
So you saw them optimizing their portfolio by selling off non-core mines as well as doing a large equity raise that they used to pay down a significant portion of debt that was due in the near term. I think the story [with Barrick] is that they are looking a lot better, and they've taken the right steps. One of the things they did over the year was shut down development at Pascua Lama, which was a project they were developing in the Andes. That project was a cost overrun and was way behind schedule; there was a lot of trouble with it. In the near term this is good because they will not be putting as much cash into such a money pit. But you know we're a little mixed about it because it was supposed to contribute some meaningful ounces at a very low price.
Redmond: Yes, I remember reading about this project in the analyst report. So the other company I want to talk about is Goldcorp. What's your position on them?
Inton: Goldcorp's been doing pretty well actually. For 2013 they met their production guidance and were actually below their all in sustaining cost guidance as well. And looking forward to 2014, it looks like it’ll be a very good year for Goldcorp. Production is expected to be up in the double digits and production costs are actually expected to be down, which is surprising.
One really interesting thing happening with Goldcorp right now is the hostile bid that they made for Osisko Mining. Osisko Mining owns the Canadian Malartic mine in Quebec.
We’ve heard that Goldcorp has disclosed that they were in prior talks about an acquisition, but it broke down sometime last year. And Goldcorp went ahead and decided to do a hostile bid. So they are offering shareholders of Osisko a mix of cash and stock at a pretty decent premium when you take out the effect of the acquisition.
I think it would be a pretty good deal for Goldcorp. That being said Osisko is resisting it. They are actually suing Goldcorp, saying that they violated confidentiality agreements that they had in place when making the bid. Originally, Goldcorp had a deadline in February for Osisko shareholders to accept their offer, but that's been pushed to March because of the trial. So, we'll see what happens.
That being said, I think that even though this mine would contribute some good ounces and it would be a good add for Goldcorp, I don't think Goldcorp necessarily needs this deal to be successful. We think that they are going to have a pretty good year going forward.
Redmond: Overall, when you take a look at gold throughout the landscape, do you think it's going to have a better year than it did in 2013?
Inton: I think it's always tough to say that because you never really know what is going to happen with gold. And right now futures prices are pointing to prices just below $1,300 an ounce for 2014 and our long-term view is a price of $1,255 an ounce. We feel that rising real interest rates and the marginal production of gold miners really determines that price for us.
I think from the gold miner's perspective that 2014 will be more stable than 2013; 2013 was a year where it was very shocking for them to adjust to gold prices. But the miners all took the approach of switching from a production focus to a cash flow focus. Now in 2014 we should start seeing that benefit [of that] and seeing more stability in their performance.
Redmond: Gold should be interesting to watch in 2014.
Inton: Definitely.
Redmond: Thanks so much Kris.
Inton: Thank you.
Redmond: To find out more information, go to the stocks page of Morningstar.ca.
