In last week's edition of the IWB, both Gordon Pape and my fellow columnist Tom Slee wrote about the recent correction in commodities. Both suggested that this pullback presented a buying opportunity. I agree, particularly if you missed the big run-up we've had this past year and were waiting for an opportunity to get in, or get back in, to some of the stocks that have been flying high for the past several months.
Tom focused on copper and had some excellent recommendations. Today I'm going to second what both of them said and add another name to the list that will be familiar to most of you. It is a company that has had some changes recently, which I think makes it a compelling buy at these prices. That company is Barrick Gold (NYSE:ABX).
Barrick and its chairman Peter Munk are well-known to most Canadian investors. Mr. Munk has been a legend in the gold industry and even now in his early 80s he is still a force to be reckoned with. He built Barrick into the world's largest gold producer with over 25 operating mines augmented by a number of land positions and exploration projects that will guarantee future supplies.
Historically, the company has been very conservatively run with a "solid gold" balance sheet, good cash reserves, and intelligent hedging operations. It also has large deposits of silver mixed into its portfolio and has some significant copper production as well, projected to be approximately 300 million pounds in 2011.
But that amount of copper production did not satisfy Barrick's new CEO. Aaron Regent, who is considered to be a rising star in the mining industry, was brought on board in January 2009 to provide a smooth transition from Munk's day-to-day leadership. Mr. Regent was previously CEO of Falconbridge Limited, which was taken over by Swiss mining giant Xstrata (OTC:XSRAF) in 2006. That job at Falconbridge, along with other senior positions at Noranda and Brookfield Asset Management, certainly qualifies Mr. Regent to be a successor at Barrick. Additionally, he has a strong financial background, having started out his career as a CPA.
This past month, Barrick announced a major acquisition, purchasing Equinox Minerals (OTC:EQNMF) at a price of $8.15 per share for a total equity value of approximately $7.3 billion. Equinox's primary asset is a large copper mine in Zambia. It also has a significant copper-gold project under construction in Saudi Arabia. The company had planned, and presumably still does, to produce 320 million pounds of copper metal concentrates in 2011. The company's operating cost to produce that copper is $1.45 per pound, which is well below the current price (around $4 per pound) for copper. Both companies are based in Toronto, so the integration of Equinox into Barrick should not be too daunting.
Recently, both companies announced very good first-quarter results. Equinox generated an operating profit of $97.7 million, which was an increase of 19% when compared to the corresponding period in 2010. Barrick's first-quarter profits also beat estimates, with net income rising 22% to $1 billion ($1 a share), up from $820 million ($0.82 a share) a year earlier.
The Street did not like this deal initially, and Barrick shares sold off 9.8% in the two days after it was announced. The stock is currently trading nearly 22% below its 52-week high of $55.99. This brings the company in at a trailing p/e ratio of 13.2 and a forward p/e of 9.6. The stock pays an annualized dividend of $0.48 a share to yield just over 1%. The next dividend is payable on June 15 to shareholders of record at the close of business on May 31.
I think there are three catalysts that will propel Barrick stock higher. First, we've had a sizable correction in the commodities market, which provides a good reason to reconsider your positions in the precious metals sector. Second, there is a new, well-qualified CEO at the helm of Barrick who is demonstrating that he wishes to aggressively expand the size of the company. Third, the acquisition of Equinox Minerals broadens the company's portfolio and increases its exposure to copper, which, as Slee pointed out last week, should continue to face supply shortages and high demand over the next several year.
The new profile of the company gives investors deep exposure to gold, some exposure to silver, and now a much greater exposure to copper. This makes it a premier place to take a position in what I continue to believe will be a long-term secular bull market for commodities.
Action now: Buy with a target of $55. The stock was trading at mid-day on May 12 at C$43.62 ($45.15).
Disclosure: I am long ABX.