The best time to invest in a stock is when chips are down, but the long-term fundamentals are still bright. Barrick Gold (NYSE:ABX) is a classic case of value investing in a sector that has underperformed in the recent past, but has a bright future.
About Barrick Gold
Barrick Gold Corporation produces and sells gold and copper. It is also involved in exploration and mine development activities. The company holds interests in various properties located in the United States, Zambia, Chile, Dominican Republic, Argentina, Tanzania, Canada, Saudi Arabia, Australia, Papua New Guinea, and Peru.
As of December 31, 2013, the company had proven and probable mineral reserves of 104.1 million ounces of gold and 14.0 billion pounds of copper.
Why I Am Bullish On Gold
Gold has witnessed nearly 13 years of bull market from the beginning of 2000 to the time the precious metal peaked out at $1950 per ounce. Currently, gold trades at $1,295 per ounce and many analysts believe that the best time for the precious metal is over.
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- ABX 15-Year Financial Data
- The intrinsic value of ABX
- Peter Lynch Chart of ABX
However, I am of the opinion that gold still has good times ahead and the precious metal will bounce back soon. There are two major factors for this conclusion with the first one being geo-political tensions globally.
The geo-political worries are not likely to subside soon and in such a scenario, gold is a good buy and hold. It is interesting that Central Banks have been buying gold even as the demand for gold as an investment has declined in the last 4-5 quarters. Central Banks certainly think that gold has good value and is a good diversification for reserves.
Another reason why I am bullish on gold is the global economic scenario. Growth in Europe has been weak to negative and there is no sign of sustained improvement. Growth in US has been better, but the recent unemployment numbers suggest that it is too early to think that growth is sustained. Growth in emerging markets also remains sluggish.
In such a scenario, Central Bank will continue to have expansionary monetary policies and there will be ample easy money available in the system. This is certainly positive for gold. It might not take long for speculative money to move from one asset class to the other. Whenever that happens, gold will move higher swiftly.
I therefore remain bullish on gold and I believe that the recent decline in gold prices is a good opportunity to buy gold as well as gold mining stocks. Among gold mining stocks, Barrick Gold does look interesting.
Why I Am Bullish On Barrick Gold
Barrick Gold having a rich asset base is one of the reasons to be bullish on the company for the long-term. Whenever gold prices move higher, Barrick Gold has the capacity to increase its production from rich assets and create shareholder value.
However, at this point of time, what I like the most about Barrick Gold is the way the company has maintained its cost. Lowering cost is a big challenge and the management has done that in an excellent way for Barrick Gold.
Going into the specifics, Barrick Gold’s all in sustaining cost per ounce in 2012 was $1,014 when the average gold price per ounce was $1,669. In 2013, the average gold price declined to $1,407 per ounce and Barrick Gold reduced the all in sustaining cost to $915 per ounce. For the second quarter of 2014, the all in sustaining cost further declined to $865 per ounce. This shows that Barrick Gold has done well to reduce cost in difficult times and this is a sign of a good management team.
The decline in all in sustaining cost has helped the company generate positive operating cash flows even in the worst of times. The company’s operating cash flow declined from $5.7 billion in 2012 to $4.4 billion in 2013. However, operating cash flows were still robust considering the sharp decline in gold prices. Even for the first half of 2014, the company has generated an operating cash flow in the tune of $1 billion with the company managing its capital expenditure accordingly.
Therefore, operational excellence is the biggest reason for liking Barrick Gold and the company remains strong fundamentally even in difficult times. When good times come, the stock is likely to see a major upside.
The operational excellence for Barrick Gold is reflected in the company’s valuation as the company trades at a slight premium to its peers. Barrick Gold is currently trading at an EV/EBITDA of 6.7 as compared to an EV/EVBITDA of 5.2 for Newmont Mining (NYSE:NEM) and an EV/EBITDA of 5.7 for AngloGold Ashanti (NYSE:AU). Newmont is also a good stock in the sector, but on a relative basis, I will be tempted to rate Barrick Gold one notch better.
I am not suggesting that investors buy gold mining stocks in bulk for immediate upside. However, I am certainly bullish on the long-term prospects for Barrick Gold and I would suggest gradual accumulation of the stock. Investors can even consider a mix of Barrick Gold and Newmont Mining in their portfolio as both these companies have good assets.
However, the time horizon should be 3-5 years and investors should have the patience to hold the stock even if it has more sideways movement. The long-term upside will certainly cover for any near-term stock price stagnation.