Barrick Gold Corporation (Ticker: ABX) is a Canadian company that mines for gold and copper in Peru, Canada, the United States, Australia, Chile, and five other countries. It is the world’s largest gold producer. In 2011, Barrick mined 7.7 million ounces of gold and 451 million pounds of copper. North America accounted for 44% of Barrick’s gold production, South America for 24%, Australia and the Pacific 24%, and gold-rich Africa just 7%. As of the end of 2011, Barrick had 140 million ounces of proven and probable gold reserves. For the year, Barrick reported net income of $4.54 billion on sales of $14.31 billion. Its market cap stood at $40.34 billion as of June 20, 2012, and its shares trade on the New York Stock Exchange under the ticker symbol ABX.
This is the first in a series of articles analyzing the current status of gold stocks. Earlier this year, Silver Monthly analyzed several silver stocks, and we reviewed some common investment concepts in our first analysis of Silver Wheaton. To brush up on some terminology, go to that article. Otherwise, continue reading.
In 2011, Barrick Gold Corporation reported net income of $4.54 billion. This was up from $3.18 billion in 2010. In 2009, Barrick reported a net loss of $4.37 billion! Over the past three years, Barrick has seen its earnings per share increase by an average pace of 48% per year.
Sales came in at $14.31 billion in 2011, up from $10.92 billion in 2010 and $8.14 billion in 2009. Barrick’s three-year sales growth has averaged 28% per year.
Last quarter, Barrick fell short of earnings expectations, just missing estimates by 1.8%, with EPS still growing by 8%, year-over-year. Over the past three quarters, Barrick has averaged year-over-year EPS growth of 26%, but estimates for the current quarter – the results of which will be announced on July 28 – were revised down to -7%. Sales were up 18% last quarter.
Barrick is projected to see its earnings per share increase by 1.28% for 2012, but coming off a three-year average of 48%, this is a severe deceleration of earnings growth. On the positive side, Barrick’s balance sheet is the strongest in the gold-mining industry, with just $0.56 in debt for every $1 in equity, and its pre-tax profit margin of 48.9% is huge. Barrick earns a 21.8% return on equity for its investors, too.
Although Barrick’s deceleration of growth is troubling, its valuation metrics are those of a rather grossly undervalued stock. Barrick’s trailing P/E of 8.9 is well under the industry average of 24.9, as well as Barrick’s own five-year average of 18.6. Its price-to-book ratio of 1.7 is right in line with the industry average, but much lower than its own five-year average of 2.3. Barrick’s price-to-sales ratio of 2.7 is well under the industry and five-year averages of 3.7 and 4.4, respectively. In terms of price-to-cash flow, Barrick’s 7.8 multiple is 25% lower than the industry average of 10.4. And Barrick now pays a 1.5% dividend, which is right in line with the industry average and 50% higher than its historical average of 1%.
Yes, Barrick’s growth is decelerating, but on a forward basis, its P/E is still an ultra-low 6.8. And when adjusted for growth, this gives Barrick Gold a PEG of 0.7. What this means is that the stock could gain more than 42% and still be trading at a PEG of 1.0, which is still bargain-stock territory.
On February 2, Barrick Gold closed at $49.83. From there, it fell to as low as $34.82 on May 6, a decline of more than 30% in just three-and-a-half months. This, of course, coincides with gold’s decline. However, after bottoming out, Barrick shot to as high as $43.30 on June 6, piercing its upper Bollinger band in a failed breakout attempt, before pulling back. Then on June 15, Barrick once again pierced its 50-day Moving Average line, and now it has that line to rely on for support. As of June 20’s $40.32 close, Barrick was trading at 2.56% above its 50-day M.A., and its chart looks bullish with Bollinger bands that are beginning to ascend. With the stock still 27.9% off its 52-week high, Barick has plenty of room to run, and with gold well off its recent highs, a big surge by Barrick is probably more likely than not.
In the short-term, now looks like a good time to get into Barrick. Its fast-moving average line pierced its MACD indicator line last Friday (June 15), and since then, the stock has already notched 2% in gains. Its Williams %R and MFI are still well outside the overbought zones, although the stock does have a very low short ratio.
One unique thing about Barrick is its lack of presence in Africa. Africa is the most gold-rich continent on the planet, and most gold-miners have a significant presence there. But Barrick’s strategy calls for a minimization of political risk, and with Africa politically unstable, Barrick has concentrated its operations elsewhere. This is advantageous for Barrick and its investors. On the flip side, this puts Barrick out of the race for lowest-cost gold producer. With Barrick, you’re getting a safer, more reliable miner, but the margins aren’t going to be as spectacular as the riskier gold miners when times are good.
This conservative approach led Barrick to hedge against gold prices for most of its history. With gold on a huge bull run for most of the past decade, this led Barrick to be among the least attractive of gold miners, and as a result, the firm spent $5.2 billion in 2009 to eliminate hedges on 9.5 million ounces of gold. Now that gold prices have been on the decline, the wisdom of this de-hedging – or at least the timing of it – is questionable.
As an ultra-short term play, Barrick looks good based on its chart. As a more intermediate term play, the deceleration of growth is troubling. As a longer-term play, those valuation metrics make it look like a better buy. Perhaps a wise course of action would be to enter Barrick as a short-term play, aiming for gains of 10-12%, while setting an 8% stop-loss. Then, after selling for a profit, wait for the stock to come back a bit before entering it as a long-term play.