By Larry Gellar
Barrick Gold's (ABX) stock is moving down at the time of this writing, and I'm sensing a buying opportunity. The company just released its earnings report for the first quarter, which was slightly disappointing compared to analyst estimates. Specifically, analysts predicted adjusted earnings per share of $1.10 per share on revenue of $3.74 billion, while Barrick Gold reported adjusted earnings per share of $1.09 per share on revenue of $3.64 billion. Needless to say, this was not a terribly huge miss, and a variety of other numbers are working in Barrick Gold's favor. For instance, Barrick Gold's average selling price for gold was over $300 higher per ounce this quarter compared to the same quarter last year.
Meanwhile, the company's average selling price for copper was lower than this time last year, but sales were significantly higher. Sales jumped from 80 million pounds to 119 million pounds. As for production, gold declined slightly, while copper saw a notable jump in that area as well. Production increased from 75 million pounds a year ago to 117 million pounds in the last quarter. In many ways, this is the beauty of a company like Barrick Gold - the chances of the company having significant failure in both gold and copper at the same time is very unlikely. And while net cash costs did increase for both commodities, I don't think this should deter investors given Barrick Gold's optimistic forecasts for 2012 overall - the company is predicting 7.3 million to 7.8 million ounces of gold and 550 to 600 million pounds of copper.
A stock like Barrick Gold is the type of asset that every investor should have in his or her portfolio. After all, it serves as an important way to minimize risk in these volatile times. Barrick Gold compares favorably against similar companies as well. For instance, Barrick Gold has a price to earnings ratio of 8.75, which is lower than stocks such as New Gold (NGD) (22.19), Almaden Minerals (AAU) (15.90), AuRico Gold (AUQ) (12.23), and IAMGOLD (IAG) (11.97). Barrick Gold also has a price to book ratio of 1.73 and price to sales ratio of 2.83, both of which are appetizing as well. Margins are important to look at too, of course. Those numbers for Barrick Gold are 31.7% net profit, 55.87% gross, 56.52% EBITD, and 46.63% operating. That puts Barrick Gold at about the middle of the pack, which is certainly not a problem considering its favorable price to earnings ratio.
Of course, I would be remiss to not detail some of the issues with investing in a stock like Barrick Gold. For instance, probably the biggest problem with this earnings report was the company's increasing costs. That can be tracked down to specific operations such as the Lumwana mine in Zambia. There, Barrick Gold was hurt by negative ground conditions caused by unusually wet weather. In fact, the issues there could keep up due to further maintenance on the location's mills. Other mines did fare better, however. For instance, the Zaldívar mine in Chile was able to produce at a cash cost of $1.51 per pound (compared to $3.15 per pound for Lumwana). I can see how it might be tough for a risk-averse investor to stomach these numbers, but I do think Barrick Gold shareholders will benefit in the long run.
There has also been other news that should help Barrick Gold going forward. For instance, the company decided to sell its shares of Highland Gold Mining Limited. Barrick Gold received about $130 million for the 20.4% stake, and this certainly seems like more than a fair price. Additionally, Barrick Gold determined that the business was not part of its core strategy, so this move could help Barrick Gold focus on more pressing issues. After all, Barrick Gold was using resource to monitor the situation at Highland Gold when the problems at its Lumwana deserved more attention. Consolidation could also be useful at a time when commodity prices are a bit uncertain.
At the same time, Barrick Gold made a wise decision to buy Equinox Minerals Ltd. CEO Aaron Regent detailed some of the company's plans for that subsidiary during the earnings report Q&A, and I'm expecting a smooth transition. Equinox will conform to Barrick Gold's operating procedures, and Barrick Gold has already identified Equinox's most valuable assets. For instance, the Chimi deposit in Chile is predicted to be economically useful for thirty to forty years once that area really gets going. The Jabal Sayid deposit should also be lucrative, although Aaron Regent cautioned that there could be higher than usual costs for that one in its beginning.
CEO Aaron Regent also had interesting comments about issues at Barrick Gold's Porgera operation. There, Barrick Gold has had the misfortune of dealing with knocked-down power pylons and other calamities. Mr. Regent seemed to be confident that law enforcement would be able to handle the situation. Another problem is that natural gas prices are skyrocketing in Papua New Guinea, although Barrick Gold may be able to make a deal that decreases uncertainty there. If nothing else, management did say that the situation is taken into account in its cash cost estimates, so the number mentioned at the press conference do reflect that.
Finally, Barrick Gold announced a quarterly dividend of 20 cents per share. Barrick Gold was just under $40 at the time of this writing, so that's not a tremendous amount but still better than nothing. With $5.315 billion of operating cash inflow during 2011, this company appears to be financially solid. Cash outflow from investing activities was actually a whopping $12.827 billion, but I don't view this as a problem so long as gold prices remain high. Indeed, Barrick Gold is a good play for those looking to get exposure to gold and don't mind taking on the additional risk/reward of investing in an actual gold company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.