Substantial Upside For Barrick, Kinross

| About: Barrick Gold (ABX)
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Given runaway spending and the inability of politicians to take on the third rail of politics, inflation is rightfully a huge concern for many individuals. Gold is the obvious hedge that protects investors from seeing the painful erasure of hard-earned wealth. But only certain producers within the industry offer meaningful upside. The National Inflation Association (NIA) has been providing investors with top gold stocks that specifically address this pressing issue. I am subscriber (see here) and continue to protect my wealth through their strategies. Two gold producers that I have since become interested in are Barrick Gold (NYSE:ABX) and Kinross Gold (NYSE:KGC).

From a multiples perspective, Barrick - the "hedging miracle" - is the cheaper of the two. It trades at a respective 11x and 8.2x past and forward earnings while Kinross trades at a respective 12.7x and 8.2x past and forward earnings. Both have incredibly low volatility with a beta of 0.4. With Goldcorp (NYSE:GG) trading at 19.9x past earnings and New Gold (NYSEMKT:NGD) trading even higher at 20.8x past earnings, Barrick and Kinross have substantial room for multiples expansion. While Goldcorp is attractive in the sense that it has meaningfully boosted value at Marianas and San Maroc with strike length increases, the company faces significant risks in ramping up Penasquito . I find that both Barrick and Kinross have structurally lower risk.

At the third quarter earnings call, Barrick's CEO, Aaron Regent, noted strong performance:

"We reported a 45% increase in net earnings to a record $1.37 billion, or $1.37 per share. Adjusted net earnings were up 52% to $1.39 billion, or $1.39 per share. This equates to an annualized 25% return on equity, up from 21% in the second quarter. And our operating cash flow increased by 35% to a record $1.9 billion.

Our cash margins continue to expand, reflecting our leverage to the gold price. Cash margins increased by 55% to nearly $1,300 per ounce, and net cash margins were up 51% to over $1,400 per ounce. Our projects in construction remain on track, with production at Pueblo Viejo and Pascua-Lama anticipated in mid-2012 and mid-2013, respectively".

Barrick is well diversified in copper, gold, oil, and gas. Third quarter results showcased excellent momentum in production and, thankfully, management reiterated a commitment to returning free cash flow to shareholders. Management raised its quarterly dividend by 25%, which has increased by more than 170% over the last five years. The company produced 1.9M oz at a total cash cost of $453 per ounce and has a consistent track record of beating expectations. While the large projects in Donlin Gold and Cerro Casale come with risks, management is likely to focus on smaller-scale endeavors hereafter.

Consensus estimates for Barrick's EPS forecast that it will grow by 47.3% to $4.89 in 2011 and then by 21.7% and 14.6% more in the following two years. Assuming a multiple of 12.5x and a conservative 2012 EPS of $5.91, the rough intrinsic value of the stock is $73.88, implying 53.9% upside. If the multiple were to plummet to 8x and 2012 EPS turns out to be 10.8% below consensus, the stock would fall by 11.5%. This favorable risk/reward merits the "strong buy" rating on the Street.

Kinross Gold is another attractive miner. Production is trending from 2.6 MMoz in 2011 to 4.4 MMoz in 2015. The Mauritania Tasiast project will help drive these greater volumes. And, furthermore, after 2 years of delay, management has finally reached an agreement with the Ecuadorian government over the Fruta Del Norte gold project. The greater certainty has de-risked the business and will help attract even more investors. As Kinross has frequently underperformed peers and the broader price movement in gold due to high expectations for capes, the ramp up at Fruta Del Norte is a step in the right direction.

Consensus estimates for Kinross' EPS forecast that it will grow by 44.8% to $0.84 in 2011 and then by 46.4% and 17.9% more in the following two years. Of the 5 revisions to estimates, 3 have gone up for a net change of 2.7%. Assuming a multiple of 12.5x and a conservative 2012 EPS of $1.18, the stock has 43.6% upside. Modeling a CAGR of 35.7% for EPS over the next three years and then discounting backwards at a WACC of 9% yields a fair value figure of $17.89. Accordingly, why Kinross is rated a "hold" on the Street, I would rate it a solid "buy".

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.