2 Gold Mining Companies Undervalued Compared To Gold

Barrick Gold (ABX) and Newmont Mining (NEM) have suffered due to the recent downtrend in mining companies. If we take into consideration that gold prices are 11% above their 52-week lows, while the stock prices of Barrick Gold and Newmont Mining are at one-year lows, we can assume this downward trend may have gone too far.

Newmont Mining and Barrick Gold focus on the exploration of gold and copper mines. With gold exploration representing around 85% of sales in these companies, the price of this precious metal will be the main driver of their results. Note that Newmont Mining will announce earnings results on April 27 and Barrick Gold on May 2, which could mean a significant trend inversion in the next two weeks.

Geographically, Newmont Mining has a majority of its sales in Europe (71%), while Barrick Gold focuses on North and South America (72%). For this reason, it would be better to compose a portfolio that contains both companies in order to diversify geographically.

	ABX	NEM
North America	48%	3%
Asia Pacific	21%	24%
Europe	-	71%
Africa	8%	-
South America	24%	-
Others	2%	2%
Total	100%	100%
Source: Bloomberg

Let's analyze these names using two possible scenarios. The optimistic scenario is based on analysts' expectations, while the pessimistic scenario is based on the lower (but positive) net income of the last five years.

NEM						ABX
Total Debt *	11.703					Total Debt *	23.330
Total Assets *	27.474					Total Assets *	48.884
Debt Ratio *	43%					Debt Ratio *	48%
	Better	Worse					Better	Worse
Net Income *	2.384	366				Net Income *	4.838	785
Mkt Cap *	23.380	23.380				Mkt Cap *	40.277	40.277
PER	9,81	63,88				PER	8,33	51,31
* Source: Bloomberg						* Source: Bloomberg

Here is a list of reasons to choose Barrick Gold or Newmont Mining:

1. In the optimistic scenario, Barrick Gold presents a lower PER (price-to-earnings ratio) than Newmont Mining by 1.5 years.
2. In the pessimistic scenario, Barrick Gold presents a lower PER then Newmont Mining by 12 years.
3. Barrick Gold's lower net income occurred in 2008 when gold was at half its actual price, while Newmont Mining's lower net income occurred last year when gold was at an all-time high.
4. Newmont Mining has a lower debt ratio and its lower market cap makes it easier to be acquired.

I would suggest buying Barrick Gold and Newmont Mining, but if you have to choose between the two, Barrick Gold is a better choice.

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Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ABX over the next 72 hours.