By Robert Gordon
Federal Reserve Chairman Ben Bernanke has for several months been warning of a pending "economic cliff" toward which a confluence of factors are careening the U.S economy. These factors include the expiration of Bush era tax cuts, extended unemployment benefits, the end of the social security payroll tax cuts, and the automatic $1.2 trillion in budget cuts since the so called "super committee" failed to agree to any sort of budget reform last year. All these occur effective January 1, 2013. Since it is fewer than six months before the next election cycle, Bernanke realizes it unlikely that this dysfunctional Congress can make serious changes in tax and budget policy, hence the urgency. Bernanke went so far to warn, in person, key lawmakers of this "economic cliff" in late February.
So, where do investors think to turn in the face of economic uncertainty? Gold of course. However, it is easy to critique gold. Warren Buffett of Berkshire Hathaway (BRK) fame has made a niche of explaining that gold bullion is about the worst long-term investment one can make, trailing not just stocks, but bonds as well given a long time horizon. He likes the analogy that all existing gold would form a 68 foot cube, worth a little under $10 trillion dollars. For that, one could buy 16 Exxon Mobil's (XOM), all existing U.S. cropland, and still have $1 trillion left over for pocket money. That is pretty compelling stuff, yet I am going to talk not about gold bullion, but about gold mining, where efficiency itself is rewarded by the market.
Barrick Gold (ABX) is the West's largest gold mining company, with 2011 production of 7.7 million ounces, along with interests in copper. The Canadian mining giant's stock has fallen from the mid 50s per share in much of 2011, by about 35%. The price of gold bullion is now, about where it was January 1, 2012, but far below yearly highs of $1788 per ounce back in February. As of May 14, 2012, gold futures prices were $1561 per ounce. Barrick operates 26 mines across five continents. In the first quarter of 2012, Barrick reported earnings of $1.09 billion, or $1.09 per share. This was an 8% jump from the same period of 2011.
Barrick gave a nice batch of insight into its future at the Bank of America Merrill Lynch 2012 Global Metals, Mining and Steel Conference on May 15, 2012. The company foresees total 2012 gold production at about 7.55 million ounces, and total copper production at about 575 million pounds. The case for the company's attractive future potential comes to mines currently under development, one of which, Pueblo Viejo, is scheduled to open later this year. Barrick owns a 60% share of the mine's output, and the company expects $0.80 billion EBITDA annually if gold prices remain at about $1,600 per ounce. Next up will be the Pascua - Lama Mine, expected to enter production in the third quarter of 2013, which Barrick anticipates to add $1.65 billion EBITDA annually if gold is priced at $1,600 per ounce.
Barrick also has numerous gold and copper mines on its horizon, and has the financial health to make acquisitions. To be honest, I am not a fan of the gold mining industry, but if you are, this one makes tremendous sense over the next 24 to 36 months. As an added bonus, the company recently raised its dividend to a quarterly $0.20 per share, for a yield of 2.2%.
Goldcorp (GG) is another international mining company based in Canada with operations throughout North and South America. While like Barrick it is gold based, it is somewhat more diversified as it has interests in silver, copper, lead and zinc.
Goldcorp's stock has fallen 33% since touching $50 per share in early March, 2012, exaggerating the fall in the price of gold in that same time frame. In the first quarter of 2012, Goldcorp reported earnings of $404 million, or $0.50 per share. This beat by 2% the $0.49 per share from the first quarter of 2011.
At the Bank of America conference in mid-May, Goldcorp gave us a glimpse of its promising future. The above mentioned Pueblo Viejo mine, scheduled to begin gold production mid-2012, is 40% controlled by Goldcorp. Its massive Penasquito Mine should have full production again this year, and the company has numerous other mines that will open by 2014. Since all of Goldcorp's properties are in North and South America, there is the perception that it operates exclusively in more stable parts of the world than do other international mining companies.
Goldcorp offers a dividend yield of 1.5%, and despite its potential for growth in revenues and profits, I do not see this having the kind of value at its current price as I see in Barrick.
Kinross Gold (KGC) is another Canadian based company with operations in North America, South America, Africa and Russia. Shares in the company have fallen some 60% since late 2011. Some of that decline in price is due to being in concert with the other gold mining companies, but Kinross has a special issue. It wrote off a staggering $2.94 billion in a goodwill impairment charge related to its Red Back deal. Obviously, the purchase in 2010, near the height of the recent gold price run up, was not well timed.
In the first quarter of 2012, leaving aside the massive one-time charge, adjusted earnings were $203 million, or 0.18 per share, versus the previous year's $175 million, or $0.15 per share. But the internal numbers were not so good. Mainly, Kinross' production cost per gold equivalent ounce soared to $742 per ounce from $545 per ounce in the year ago quarter. Management attributed this to factors including higher production and labor costs.
But the stock has been punished so harshly, that by most any measure, Kinross is undervalued. It is selling now at a 34% discount to book value, and is a rather obvious takeover candidate. Those with a speculative bent might want to jump on board, while those with value orientations should look closely as well.