This Gold Company’s Dip is a Buying Opportunity

Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The 6% decline in the price of Barrick Gold (NYSE: ABX) last week represents an excellent opportunity for investors to acquire shares of this industry leading company. While the attention received by the gold market has waned somewhat as the hype of the Federal Reserve’s announcement of more quantitative easing has given way to the focus on the U.S. Presidential election, the global macroeconomic factors that are driving the commodity price have not changed. Barrick remains the largest gold miner in the world, and with its talented management team, the stock is a strong buy on the recent pullback.

Global Macroeconomics

Driving a decline in the precious metals markets were Spain’s third credit rating downgrade and the highest level of earnings pessimism measured amongst executives since 2001. While at initial glance, more bad news for Europe would seem like a positive for safe haven investments like gold and silver, there are competing forces at work. General economic weakness is bullish for precious metals, but the downgrade in Spain is also bullish for the U.S. dollar. As the dollar strengthens against foreign currencies, dollar-denominated investments become more attractive. This second phenomenon is bearish for metals. Typically the impact of the currency movement is felt more immediately, while the longer-term weakness takes time to be reflected in the commodity prices. As such, the weakness in gold and gold stocks can be seen as an opportunity.

The 2012 Gold Outlook

While I do not typically target a single report as a critical source of information, the October Metals & Mining Stock report recently released by Zack’s Equity Research is worth reading and taking to heart. I will discuss some of the highlights herein, but the entire report is worth a read.  Here are some critical highlights:

  • In the second quarter of fiscal 2012, gold demand was at 990 tons, down 7% year over year. Increase in demand from central banks was offset by declines in demand for jewelry, investment and in the technology sectors, due to higher prices. 
  • As prices for gold rise further, gold giants such as Barrick Gold and Goldcorp being unhedged producers of gold will enjoy significant leverage to gold prices. The cost increases need to be controlled in order to rake in profits.
  • Lingering economic concerns, higher inflation expectations in many countries, including India and China, and the relentless Euro-zone debt crisis will continue to drive gold prices this year, as well. India, which alone consumes nearly 45%−50% of the world’s gold, should drive demand for gold along with China. China will likely emerge as the largest gold market in the world in 2012 and Chinese gold demand is expected to double in 10 years.

The takeaway from this report is that the picture for gold for the rest of 2012 and into the future is very solid. Companies with solid positions like Barrick and Goldcorp (NYSE: GG) are well positioned to benefit and should be considered top picks by investors.

Choosing Barrick

While there are plenty of negative opinions of Barrick circulating – far too many to specifically cite or link to – the top complaints about the company are that it’s year-to-date performance has lagged its competitors because of the April acquisition of Equinox Minerals and the position that their new CEO is not a reformer, but a step backwards. I disagree vehemently with both of these arguments against the company, and believe that the evidence supports my contention. The Equinox acquisition was undoubtedly on the pricey side at $7.2 billion dollars, but it gave the company expanded diversification and a solid source of copper. As China pulls out of its slowdown, copper prices will rise.

With reference to Jamie Sokalsky, while the ultimate proof will be over the longer-term, his actions thus far seem to be on target. He has vowed that the days of growth at all cost are over, and has looked to streamline the company by selling some of its less lucrative properties. It is too soon to pass judgment on his stewardship over the longer haul, but early indications are positive.

By the numbers, the company remains the single largest gold miner in the world and has an attractive valuation versus its peers with a trailing P/E of 9.5 relative to 26.9 for Goldcorp, 117.7 for Newmont Mining (NYSE: NEM) and negative earnings for Kinross Gold (NYSE: KGC). Newmont and Kinross are also plagued by rapidly increasing mining costs and falling ore grades, each of which will cannibalize the advantage of rising gold prices. Barrick, which is still considerably larger than Goldcorp, will enjoy a significant degree of isolation from rising costs and is overall better positioned than any of its peers. Given all of the above factors, Barrick’s selloff should be seen as a buying opportunity.

Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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