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Gold is a hot topic right now. Barrick Gold Corporation (NYSE:ABX) is the largest gold miner in the world. Barrick is based out of Ontario, Canada, and owns gold and copper mines on four continents. Barrick pays a fantastic dividend of $0.80 at a yield of $4.30. However, the stock is floating near its 52-week low of $17.51 as opposed to its 52-week high of $43.30.

Let's dissect where the company is by looking at our four rules for the common stock. Benjamin Graham set forth these steps as a baseline to evaluate a stock for the defensive investor. The four steps are set forth in the fifth chapter of his book.

  1. There should be adequate though not excessive diversification. This might mean a minimum of 10 different issues and a maximum of about 30.
  2. Each company selected should be large, prominent, and conservatively financed. Indefinite as these adjectives must be, their general sense is clear. Observations on this point are added at the end of the chapter.
  3. Each company should have a long record of continuous dividend payments. To be specific on this point we would suggest the requirement of continuous dividend payments beginning at least in 1950. (From 1973)
  4. The investor should impose some limit on the price he will pay for an issue in relation to its average earnings over, say, the past seven years. We suggest that this limit be set at 25 times such average earnings, and not more than 20 times those of the last 12-month period.

Keep in mind the criteria is for the defensive investor based on a conservative framework. Each investor should decide what metric he or she wants to use when evaluating a stock.

  • Barrick is in the basic materials industry.
  • Barrick's revenue for the past 12 months stands at $14.34 Billion. The current assets are $47,282,000,000 and liabilities stand at $25,437,000,000. Graham wanted to see twice as many assets as liabilities.
  • Barrick has paid a dividend on the NYSE since it was first listed in 1987.
  • Barrick has a current past 12-month earnings of ($0.86). The P/E for this would be -17.20. The earnings for the last seven years are as follows.

Year

2012

2011

2010

2009

2008

2007

2006

AVG

25 P/E

EPS

-$0.66

$4.48

$3.47

-$4.84

$1.01

$1.19

$1.42

$0.87

$21.75

Risks

The prices of gold mining companies are tethered to the price of the ore they mine. Recently gold has been on a fall as has Barrick. If gold continues to fall, expect the same for the stock price. Another concern is that once gold is used in a product it can be extracted, melted and reforged as needed. This creates an increase in supply of the material. It's not like oil where once used it is gone forever.

Looking at the balance sheet we see that cash assets have decreased the past couple of years, but inventories have increased. This is throws up a red flag. At first glance a dividend-paying stock with a decrease in cash over the past couple years suggests negative cash flow. Negative cash flow coupled with an increasing inventory suggests that Barrick is not able to sell the minerals it mines fast enough.

Conclusions

Gold itself does not really do anything; the price simply goes up or down, usually based on the sentiment of the economy at large. However, a gold mining company is an alternative as many pay dividends, returning value to the shareholder.

Right now gold miners are difficult to assess; we are coming down off of all-time highs. As the global economy improves people may move away from the gold hedge many have used for the past couple of years. If it does then the spot price will drop as will the price of miners. It is best to conduct very thorough research for yourself if looking at a gold miner for a long-term investment. Compare the company against metrics you trust and come to an informed and final conclusion. The last thing any of us wants is to lose money.

Source: Is This Miner Worth Its Weight In Gold?