Gold continues to hover above $1,500 an ounce. Given the concerns over sovereign debt, rising inflation, worries about Federal Reserve policies and several geopolitical risks that could turn out to be black swan events; the prospects for gold staying at these levels or rising in the near future are substantial. Even as the Gold ETF GLD has increased 100%, gold mining stocks have risen only 12% in the same timeframe. Given this, I think it is time to pick up one of the best gold miners in the industry; Barrick Gold (NYSE:ABX).
Barrick Gold Corp. - Barrick Gold Corporation engages in the production and sale of gold, as well as related activities, such as exploration and mine development. The company has a portfolio of 25 operating mines and a pipeline of projects located in North America, South America, the Australia Pacific region, and Africa. It also produces copper and holds interests in oil and gas properties located in Canada.
10 reasons Barrick Gold is significantly undervalued at $44 a share:
1. ABX is selling at 10 times this year's projected earnings and just 9.5 times 2012's consensus EPS. Consensus estimates for 2011 and 2012 have been raised in the last two months.
2. Barrick Gold has increased revenues by an average of over 22% annually over the past five years. Earnings have increased an average of 15.5% over the same time span. ABX trades for a projected PEG of less than .7.
3. ABX has pulled back 20% over the last two months and is now selling at the very bottom of its five year valuation range based on P/B, P/S, and P/CF. This oversold stock is now deep in bargain territory based on historical measures.
4. Barrick Gold has an A- rated balance sheet, has a beta of under .5, and has a dividend yield of 1.1%. It has had a five year dividend growth rate of over 18% annually. It has ample cash flow to increased dividend payouts significantly in the future, and might be compelled to do so to differentiate itself from the Gold ETF.
5. In its last quarterly report, it reported costs to produce an ounce of gold of $437 an ounce. Given gold's current price of $1544 an ounce, its margins are huge. To put in perspective, ABX has 140mm ounces of proven gold reserves. At current prices, that represents a margin of $154 billion; substantially above ABX's current market cap of $44 billion. This also does not include the company's copper and silver assets, potential of future finds or expansion of current properties and reserves.
6. Its portfolio operates in relatively stable environments. 40% of gold production comes from North America, 28% from South America and 25% from Australia/Pacific.
7. It is increasing gold production. It produced 7.423mm ounces of gold in 2009. It produced 7.765mm ounces of gold in 2010. It has plans in place to produce 9mm ounces of gold by 2015. This bodes well for continue revenue and earnings growth.
8. Barrick Gold's recent acquisition of Equinox Minerals will give it long lived copper assets and moved its revenue mix to 80%Gold/20%Copper. This provides some diversification and should also improve cash flow.
9. The new CEO has made it known that he wants to expand the size of the company. Barrick's financial strength certainly gives it the ability to do so, and will allow Barrick to ride the long term secular trend in rising commodity prices.
10. Barrick Gold is significantly under analysts' price targets selling at $44 a share. S&P is at $75, price target at Credit Suisse is $63 and JPM Morgan is at $57. Strong Buy.
Disclosure: I am long ABX.