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Marc Faber's Golden Tip
Posted by: Fede Zaldua (IP Logged)
Date: October 26, 2013 05:12PM

Marc Faber, the Gloom, Boom & Doom writer, is not particularly bullish on stock prices. In his own words, after the S&P 500's 20% year-to-date rally, investing in the index could be compared to holding “dead money”. That said, he pointed out that one asset might be cheap: Gold.

Faber argues that the yellow metal's price might be bottoming. He says that some hard facts such as China's growing demand for gold (which shall surpass global supply in 2014) should sustain its price at least at the current level. Besides, he sustains that many projects that were expected to keep gold's supply going, are no longer profitable. Here I want to offer you one alternative to Gold's famous ETF, the SPDR Gold Shares (GLD).

One Leveraged Bet

Many exploration companies may not survive at current gold prices (now at around $1,300 per ounce) but some of them will and the market seems to be over-discounting the currently tough scenario they are going through.

My favorite large gold producer is, by far, Barrick Gold (ABX). Even when the company has a larger debt leverage than most of its large capitalization peers (at just above 2 times 2013 EBITDA), management is focused on Free Cash Flow, returns and high-margin projects such as Pascua Lama, which should become operative by mid-2016.

Most importantly, Barrick is the lowest cost senior producer in the industry and has an spectacularly great asset base to support future volume growth. Besides, I see the company as being able to completely fund Pascua Lama Capex (there are $4.5 billion left to be invested on an estimated total of $10 billion) while getting some leverage off its balance sheet through asset sales – the company aims to sell its higher cost mines.

The reason to buy is simply Barrick's market price. Barrick trades at 2013 5.5 times EV/EBITDA and 7.4 times earnings which seems conservative given that any up-tick in the price of gold could boost the company's bottom-line and further reduce estimated valuation and net debt to EBITDA multiples. As a matter of fact, according to Credit Suisse's estimates, if the price of gold goes from $1,300 an ounce to $1,500 an ounce, Barrick's 2015 net debt to EBITDA multiple would go from an estimated of 2.6 times down to an estimated multiple of 1.7 times.

On relative valuation, the figures speak for themselves. Higher-cost producers such as Goldcorp (GG) or Kinross Gold (KGC) sell for 2013 29 and 16 times earnings, respectively. Even when they are both half as leveraged as Barrick is, they also offer a much lower reward in the case gold prices bounce back.

Bottom Line

I am not a fan of investing in gold. I never fully understood why gold should be valuable. After all, its just a beautiful metal without much industrial use. This is the reason to explain why I have always preferred to invest in mining companies whenever I had to get exposure to the metal. If I was now looking into getting some exposure to gold prices I would do so through the cheapest low-cost producer: Barrick Gold.


Stocks Discussed: GLD, ABX, GG, KGC,
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