While gold continues its climb, the fortunes of Barrick Gold (NYSE:ABX) remain mixed.
The company posted a 26% increase in revenues to $3.79 billion in the most recent quarter. But not all was good, as earnings of $959 million (96 cents per share) essentially were unchanged from last year. And stock performance has been meager, with ABX shares off 8% in the past year.
Can Barrick Gold turn things around for investors? Let’s take a look at the pros and cons of ABX:
Pros
World Gold Leader: Barrick Gold is the largest gold producer and has 26 operating mines in North America, Africa, South America and Australia. In 2011, the company produced 7.7 million ounces of gold. In fact, Barrick has 140 million ounces of proven and probable reserves. The company also has 6.5 billion pounds of copper reserves and 1.07 billion ounces of silver reserves.
Catalysts: Through aggressive acquisitions and exploration initiatives, Barrick has several near-term opportunities to boost mining production. For this year, its Pueblo Viejo project, based in the Dominican Republic, will come online. Then in 2013, it will launch the Pascua Lama mine in Argentina. These likely will provide nice boosts to revenue.
Prospects for Gold: While the precious metal has been volatile, it has continued to be a solid performer. It still is highly attractive for investors who are looking for a safe haven, especially with the continued uncertainties with the world economy. Challenges include the debt situation in Europe, as well as instability in the Middle East. In fact, many central banks, such as in emerging markets, are becoming buyers of gold — many see it as a way to rely less on the U.S. dollar.
Cons
Peak Gold: Despite high gold prices, there has not been a large increase in overall global production. The reason could be that it is getting increasingly difficult to find new reserves. And even when new sources are found, they often have low grades, which increases the overall costs of extraction.
Costs: It remains tough to find qualified miners. As a result, labor rates continue to increase. Another big cost is energy, and the recent run-up in oil prices has added lots of pressure to margins. As for Barrick, it has been hedging its oil costs — but this is far from a perfect solution.
Political Risks: To find growth, Barrick and similar companies have had to expand further into global markets. While this is a good strategy, it does pose some serious risks, such as with tax hikes and even nationalization of private assets.
Verdict
Barrick is a top-notch company. It has made some smart acquisitions, such as for Equinox Minerals (which boosted the copper business), and has continued to invest in exploration. Over the long haul, these efforts should lead to higher production rates.
Unfortunately, overall costs continue to rise. So it can be tough for investors to get the full benefit of a climb in the price of gold. If anything, a better approach might be an investment in a bullion-backed exchange-traded fund like the SPDR Gold Trust (NYSE:GLD) or the iShares Gold Trust (NYSE:IAU).
For now, the cons outweigh the pros for Barrick Gold.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.
