by Jared Cummans
Gold is a commodity that needs no introduction. The precious metal has not only grown in popularity, but also in price, boosting returns for those lucky enough to have long-term allocations to the elusive metal. Lately, however, gold has been topping headlines all around the world, as the metal continually breaks new highs. Investors were shocked to see gold burst through the $1,600 per ounce mark, and then again at $1,700. So by the time gold breached $1,900, investors have almost come to expect this metal to continue its meteoric run above and beyond $2,000 per ounce [see also The Ultimate Guide To Gold Investing].
When it comes time to make a gold allocation, however, investors have a wide variety of options. They can purchase futures, physically-backed ETFs, or the stocks of mining companies whose underlying revenues come from the exploration and extraction of the respective commodity. As far as gold is concerned, few miners have more respect, or size, than Barrick Gold Corporation (NYSE:ABX). The company was founded in 1983, went public on the NYSE on 1987, and is the largest gold mining company in the world. Headquartered in Toronto, the company currently has operations in countries all over the globe including Australia, Peru, and Tanzania.
Barrick is headed by CEO Aaron Regent and the firm owns 26 operating mines across the globe. The company has an astounding level of proven gold reserves, somewhere near the 140 million ounces mark. If gold were to hold a steady $1,700 per ounce price (a conservative estimate), that reserve would be worth $238 billion-- at gold’s current price of about $1,814, the reserve values at about $254 billion.
Despite being the largest gold miner, the company also has significant operations in copper and silver as well. The company derives about 80% of its profits from gold with around 19% coming from copper, proving the significance of the industrial metal to the company’s bottom line. As far as gold breaks down, North and South American Mines account for roughly 60% of production while Australian and African mines make up the majority of the rest.
Like most miners, Barrick has received its fair share of environmental backlash from groups all over the world. Most notably, the company has been criticized due to spills of hazardous chemicals such as cyanide, mercury, and other heavy metals. In an effort to combat this negative press, the company spent almost $90 million in environmental-related projects in 2009. Barrick has been making an effort to turn around its image by purchasing wind turbines for some of its plants, using renewable energy to help power some of its operations. Investors will have to see if this helps to soothe critics’ complaints of the firm’s track record.
The company is predicting annual gold production to rise from its current 7.8 million ounces to 9 million in just five years, which may make this a good growth opportunity. Barrick is still rapidly expanding, as it has completed the construction of seven mines in the last five years. One of these new mines, in Cortez Hills, NV raked in over 1 million ounces in gold in 2010. As far as the long term is concerned, a mining company is hard to predict. While gold is a finite resource, there is always the possibility of a major discovery of huge deposits, and there is also a possibility that we will have mined all proven deposits within a several decade timeframe.
For the near-term, however, Barrick is here to stay, and will be at the mercy of gold prices. An investment in Barrick will necessitate a solid understanding of gold bullion as well as an outlook on its future. Some feel that gold has nowhere to go but up. Others, however, feel that the metal is overpriced and due for a slip. And still others have more colorful theories about a future gold confiscation, or that we simply misrepresent the amount of gold we “hold” in our vaults. Where you fall on this issue will likely give you a good barometer for how you feel about an investment in this mining behemoth.
Investors should also consider that Barrick is not alone in the gold mining world, as it has several formidable competitors in firms like Newmont Mining (NYSE:NEM), Kinross Gold (NYSE:KGC), and Goldcorp (NYSE:GG). These three firms also have robust growth predictions as well as strong business models that may chip away at the market share of Barrick, or could offer more attractive investment opportunities over the long haul.
Risks & Rewards
One of the first things to note about many miners is that a number of them hedge prices by selling gold contracts in order to guarantee they will receive a certain price for their gold. Barrick abandoned this practice when it was announced that gold production will be in a terminal decline, as we believe that we have already hit peak gold production for the globe. That latter fact though, is always subject to change; all it takes is one lucky strike. This brings up a major risk; Barrick may not be around in a few decades as we run out of gold to extract, which could dissolve investor gains if held for a long period of time. Investors with a position in Barrick should carefully monitor its performance and simply keep in mind that they are tracking a finite asset that could eventually run dry or be very hard to extract profitably.
Another risk comes from strikes, which are frequent issues with mining firms. Though they rarely disrupt long term holdings, for traders, a worker’s strike can mean volatile price swings for the duration of the disturbance. Another big risk comes from government regulation and environmental laws. Mining companies are in the business of uprooting vast plots of land to extract their respective metals, and this can often be made difficult through government and environmental regulations-- which seem to only have increased as the years go on. While they will likely never stop Barrick’s production outright, they could create a headwind for profits as laws can slow down the opening of new mines as well as add costly mandates when mining in certain areas.
When it comes to rewards, however, Barrick shines bright. With gold constantly surging to new highs, Barrick is enjoying every second of the rapid appreciation in what is considered one of the world’s few safe haven investments. The company also has a strong future outlook for growth and business operations as it has the “gold industry’s only ‘A’ rated balance sheet, which positions it well to fund its project pipeline and act on other attractive exploration and acquisition opportunities as they may arise” according to its website. With the company ramping up operations around the world, and being more environmentally conscious of how it does so, the future looks good for this firm.
Barrick’s stock, ticker ABX, has done well to rebound from its 2008 losses, as its current price is near pre-recession highs. While the stock seems prone to large swings, it has been steadily gaining for the past few years. Anyone familiar with the gains seen by gold, however, may not be too impressed. In the trailing two years, ABX has gained 50.8%, while the SPDR Gold Trust (NYSEARCA:GLD) has surged 91.3% in comparison. Also consider that ABX has a beta of 0.63, a relatively low score for a miner, which may account for its lag behind gold.
Digging through Barrick’s stock reveals a lot more about the company. For starters, many investors will be happy to see a healthy market cap of approximately $50.6 billion and an average daily volume of 8.7 million, making the stock eligible for both active traders and traditional investors. Looking closer at in-depth financials for the company, ABX has strong earnings and revenue growth on a quarterly basis while its P/E ratio is below 13, suggesting that it is still reasonably valued given its growing revenue prospects. Investors should also note that the company has met three of its last four earnings estimates, suggesting strong and stable fiscal management behind the scenes.
Also consider the yield of investing in this stock; while the dividend payout is currently 0.9% of stock price, investors should note that the quarterly dividend has been growing rapidly. In 2010, the fund had been paying out around $0.12 per share, but is currently paying $0.49, showing a potential for strong yields in the future.
Barrick’s balance sheet reveals a debt to equity ratio of 0.62, which may be off-putting for some. When compared to its competitors, Newmont, Kinross, and Goldcorp have respective ratios of 0.30, 0.03, and 0.03; making ABX’s debt seem rather large. Investors should also note that 71% of shares are held by institutions, which is not necessarily a good or bad sign, but more of a factor to consider before making any kind of allocation to this gold mining giant.
It would appear that Barrick has the wind at its back for the time being, as strong growth in the company coupled with gold’s stellar performance seems like a recipe for success. Barrick will especially benefit from continued environmental involvement, as doing its part to restore former mines and preserve current ones bodes well for a company whose image isn’t exactly squeaky clean. But for as strong as this company is, Barrick has a fair amount of healthy competitors nipping at its heels, which may prompt investors to move elsewhere.
As far as the gold mining industry is concerned overall, one has to wonder how long Barrick can continue its robust output with global gold production in a terminal decline, as we begin to dry out the reserves we have found; this may significantly impact how investors establish positions to this stock, especially for long-term investors looking to make a move in the industry.
Disclosure: No positions at time of writing.