Barrick: Look Beyond Pascua-Lama

| About: Barrick Gold (ABX)

The high price of gold does not necessarily mean a bright outlook and strong returns for a gold mining company. That is true even when discussing the largest gold miner in the world. Barrick Gold (NYSE:ABX) is an example of this seeming contradiction.

Barrick's share price has been falling all year. This time last year the company was trading around $52 per share. Now it is barely above $33. The company's market cap is now below that of its smaller Canadian rival, Goldcorp (NYSE:GG). Goldcorp's market cap stands at $32.08 billion while Barrick's stands at $33.60 billion. This is true despite the fact that Barrick mines far more gold than Goldcorp and owns many more mines. Gold, while having declined somewhat from recent highs, is still well-priced. So what problem is Barrick having?

Barrick is now worth less than Goldcorp, even though it mines more gold and owns more mines than the smaller company. Barrick has apparently been losing money all year and losing money at a rate faster than the increase of the price of gold. This loss of capitalization is reflected by Barrick's share price, which seems to be falling as quickly as the capitalization.

Interestingly, Barrick has posted strong revenue growth over the past four years. While revenue has slowed very recently, the company is still showing strong results.

Investors need to determine if there is some structural issue with Barrick that is bringing down earnings and depressing share price, or if its problems are only temporary. If the former, investors should stay away. If the latter, there is going to be great value found in the company's share price.

One big problem the company has is its Pascua-Lama project in the Andes Mountains on the border of Argentina and Chile. Costs on this project have grown enormously, almost as fast as the number of delays. Most recently project construction was suspended by the Chilean government due to concerns over workers' health. The company issued a statement saying that the delay was minor and that most of the construction at the site was unaffected. Delays at the site are considered the main reason that former Barrick CEO Aaron Regent was dismissed. The company has said that project costs will rise to $8.5 billion. This would make it the most expensive gold mine in history.

Is the mine going to be worth it for Barrick shareholders? Once Barrick starts production, it is anticipated that it can mine 17 million ounces of gold and 635 million ounces of silver. Once that happens, the costs of the operation will be a long forgotten memory as Barrick begins to rake in the cash.

Barrick is generating nice cash flow. This comes from the fact that the company has 27 operating gold mines. These mines produce roughly 7.5 million ounces of gold per year. Cash flow will obviously increase greatly when production begins at Pascua-Lama, but the company still looks nice in this department. It made five times more cash than Goldcorp in the previous fiscal year. This is further evidence that the main problem Barrick has is the news surrounding Pascua-Lama.

Barrick's value compares favorably with its competitors. Consider Newmont Mining (NYSE:NEM); this company saw earnings decline almost 30% in the third quarter of 2012. Newmont is facing increased costs while also seeing its revenue drop 10%. Yet Newmont's stock stands at around $45 per share with a market cap of $22.5 billion. Barrick is a clear bargain in comparison - trading around $33 per share with a market cap of $33 billion. Agnico-Eagle Mines (NYSE:AEM) is trading around $51 per share on a market cap of less than $9 billion. Agnico has benefited greatly with its "no forward on gold deals" policy, but one has to wonder how long that success can continue. Not only is Agnico riskier than Barrick, but Barrick looks like a steal in a comparison of valuation.

Barrick looks like a value now in comparison with many of its peers, but it also has a bright future. The Pascua-Lama project will begin production sometime in 2014. While construction continues there, the company is still operating 27 gold mines that are providing strong cash flows. Gold prices have made a recent dip, but are expected to climb back up. As gold prices increase, Barrick will look even more attractive than competitors.

Valuation wise, Barrick looks comparable to Freeport-McMoRan (NYSE:FCX). Freeport is trading around $37 per share with a market cap approaching $35 billion. These are similar numbers to Barrick. But Freeport is very exposed to copper markets. Copper has had a rough go recently and investors should be leery of jumping back into copper, and Freeport is the world's largest copper mining company.

Despite its falling market cap, I am bullish on Barrick. It has the operating revenue to stay competitive and the production that is unrivaled by its peers. I believe Pascua-Lama is the main thing holding this stock back. As gold prices go on the upswing Barrick should see steady increases in its share prices. If Pascua-Lama can stay out of the news then the company will see even greater results. There is great value to be had in the stock right now, as Barrick's assets have produced well in the past and will continue to do so into the future. I see this stock on a steady solid rise, hitting $40 by the spring, and as the date that production begins at Pascua-Lama gets closer, the stock will likely move past its 52-week high of $53 before the end of 2013.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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