by Tom Taulli | September 17, 2012 1:43 pm
Gold has shaken off its early-year cobwebs to become a nice winner in 2012, with gold prices recently reaching six-month highs in the upper $1,700s, and the SPDR Gold Shares (NYSE:GLD) ETF enjoying roughly 13% gains.
Unfortunately, the spiking prices have led to merely mixed results for miners. Not exempt from that is Barrick Gold (NYSE:ABX) — the world’s largest gold producer has actually posted a miserable 7% loss for the year to date.
So, should you buy Barrick Gold in hopes of landing a bargain when prices and positivity finally catch up to ABX? To decide, let’s take a look at the pros and cons:
Strong Platform: Barrick has a set of attractive properties including Pueblo Viejo (Dominican Republic), Pascua-Lama (Argentina and Chile) and Goldstrike (Nevada). They not only hold substantial reserves, but also are located in politically stable regions. Plus, Barrick is more than just about gold; the company also is a large producer of silver and copper (the latter business came from ABX’s acquisition of Equinox).
New Leadership: Historically, gold miners have focused primarily on production, not necessarily profits or cash flows; the result is often lagging returns on Wall Street. But Barrick’s new CEO, Jamie , says that strategy will change. Sokalsky says he will analyze capital allocation across the company’s properties and give priority to the returns on projects.
Exploration: This remains a big priority for Barrick. For 2012, the company is forecast to spend $450 million to $490 million on exploration. While it’s not easy, it’s critical that the company find ways to boost its reserves. Of course, finding new deposits is a problem for all the big players in the industry, such as Newmont Mining (NYSE:NEM) and Goldcorp (NYSE:GG).
Operational Problems: There have been ongoing cost overruns and delays at Barrick’s mines in Pascua-Lama and Lumwana (Zambia). A key problem has been lack of effective project management — and on this front, too, Sokalsky is taking action.
Costs: Stemming from the first con: It ain’t cheap to mine for gold. Labor costs continue to skyrocket amid difficulty in finding skilled workers. Barrick faces other issues, such as tax hikes, onerous permit requirements, equipment costs and even harsh weather conditions.
Gold Price: While the price of gold has absolutely soared in the past decade, it’s not guaranteed to keep up its winning ways. Consider that the price of gold plunged in the early 1980s and remained depressed for about 20 years! However, the current upward pressure on gold shouldn’t be ignored.
Barrick has a strong portfolio of mines and continues to generate strong cash flows, which came to $2 billion for the first half of 2012. Plus, Sokalsky’s focus on capital allocation is definitely positive and should produce better results over the next few years.
What’s more, Barrick should continue to benefit from the strong price of gold. Some key drivers should help gold prices maintain the bull run: difficulties in finding new supplies, the rise of investment demand from ETFs like the GLD, geopolitical problems in the Middle East and the move by central banks to buy gold as an alternative to the U.S. dollar.
Barrick also sells at a decent valuation, with a price-to-earnings ratio of just 10.
So should you buy Barrick Gold? Yes — in light of all these factors, the pros outweigh the cons for now.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, 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 hold a position in any of the aforementioned securities.
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