The Dominican Republic is expecting to turn its mining profits into its major source of income in the next couple of years. With an abundant resource of untapped gold, the country is virtually sitting on swathes of gold mines that are yet to be explored.
The Pueblo Viejo mine, located in the central part of the island, was abandoned by the state owned Rosario Dominicana almost 13 years ago after creating an environmental mess which led to green activists fuming over ecological nightmares. Not much has changed in the nation where politicians have long been known to be corrupt, bureaucratic and almost exploitative in nature when it comes to foreign mining companies. The toxic legacy of the Pueblo Viejo mine still causes a lot of people to fume and get angry. Any talk of the mine being opened to digging causes arguments from all sides involved.
While the officials at the mine and the government insist that this time the operations are going to be foolproof and there would be no environmental accidents, green activists fear that the cyanide used to treat golden ores may contaminate soil and water, especially with the island's history of hurricanes, earthquakes and natural disasters. Pueblo Viejo Dominicana is all set to begin operations under two of the largest gold mining companies in the world. The project is a joint venture in which Barrick Gold (ABX) owns 60% and Goldcorp (GG) own the remaining 40%.
The joint venture is expected to begin processing gold later this year, and in the next 18 months, the venture is expected to produce one million ounces annually. There are also plans to process nickel, copper and silver among other metals. The Dominican Republic has been very pushy in getting investors to start exploring and mining, though resources are expected to be higher in neighboring Haiti, where infrastructural and political hurdles dissuade mining companies from operations. With a 60% stake in the project, Barrick's mining prospects are likely to become well established in the Caribbean nation.
The project is going to create 2,000 jobs directly and another 11,000 jobs indirectly helping Dominican Republic to boost its economy. Invariably, the government in the Dominican Republic will become favorable to Barrick Gold's future ventures in the nation. Meanwhile, the company has denied that the usage of cyanide in its mines would harm environment in any manner. With an exceptional infrastructure and a really admirable mining experience that spawns nations across the world, Barrick is one company that environmentalists can trust, when it comes to handling the environment safely.
It is understandable that investors will point out that Barrick's growth rate is below average when we compare it with the industry average. However, its debt equity ratio is below 0.5 and its operating margin has decreased by one percent. This news can be taken with a pinch of salt but we need to understand that the company is keeping a positive cash flow even in a period when most mining companies are going through a bad phase. Barrick is currently valued around $39 and is undervalued, which makes it a very attractive investment for most buyers. Considering how Barrick has been dealing itself with respect to debt and cash flow, it can prove to be a very reliable long term investment.
Goldcorp, which is Barrick's direct competitor, has a 40% stake in the Dominican mine. However, it does not pose a significant threat to Barrick's investors as its gold production has shrunk by almost 17% in the last year. This clearly tells us that Barrick is in a very strong position when it comes to gold stock. With the development of the mines in the Dominican Republic, Barrick will be able to establish as the largest gold producer in the Caribbean, and that will certainly reflect in its quarterly reports. Barrick has a net income of $4.5 billion and cash of $2.7 billion. With a debt of $13.4 billion, it is not doing too badly. Barrick is the only gold company to have an "A" rated balance sheet.
Other competitors like Rio Tinto (RIO) have their strengths in diamonds and coal, which leaves Barrick with its own space to mine gold and benefit substantially. Rio Tinto has announced the development of a diamond mine in India, which is expected to help the company become the world leader in diamonds. BHP Billiton (BHP) has faced a lot of problems due to questions related to how it handles environment, especially in Australia. That has marred its image across the world. The only company that seems like a significant opponent is VALE (VALE), with its excellent finances.
However, we need to remember that when it comes to gold, Barrick certainly is the king. It shall continue to be so as long as it maintains its squeaky clean image. The only factor that the company must consider is making sure that the soil and water of the Dominican Republic is not polluted by cyanide, and I am sure that Barrick will make every attempt to make sure that nothing will go wrong.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.