This Giant is a Long-Term Gainer

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Headquartered in Canada, Barrick Gold Corp. (NYSE: ABX) is the largest gold mining company in the world. The company has four regional business units in North America, South America, Africa and Australia.

Barrick Gold Earnings

On the Feb. 14 Barrick Gold released its earnings for 4Q12.  The company reported a net loss of $3.06 billion or $3.06 per share, which included an impairment charge of $4.2 billion. Adjusted net earnings stood at $1.1 billion.

Barrick reported a net loss of $0.67 billion, or $0.66 per share, for the full year, including impairment charges of $4.4 billion. Adjusted net earnings were $3.83 billion or $3.82 per share while the operating cash flows were $5.44 billion. For the full year, gold production stood at 7.42 million ounces whereas for the quarter, it was 2.02 million ounces. Cash cost per ounce was $584 for the quarter and the year.

What’s in store for the future?

The company would soon be reporting an all-in sustaining cash cost for gold that would reflect the true cost of total gold produced. The company has no plans of building new mines in the near future as its current ore-bodies hold a significant output potential. The company has plans of investing more in Nevada, where Barrick has its biggest Goldrush deposit--Nevada contributed more than 40% of its total production last year. Barrick expects an average annual production of 1.5 million ounces from Pueblo Viejo and Pascua-Lama at an average all-in sustaining cash cost of $250-$350 per ounce. Further, the company has plans of selling Barrick Energy, plus its mines that have high operating costs and short lives.

For 2013, Barrick has lowered its production estimates for Goldstrike, Cortez, Lagunas Norte and Veladero. Moreover, it has also lowered its production guidance for African Barrick Gold.

Valuation

Barrick Gold is trading at a forward P/E (1yr) of 4.46x, depicting the fact that it’s relatively cheap in the gold industry. It’s yielding a dividend of 2.50% and has a healthy PEG of 1.67. Using an average forward P/E (1yr) of 11x, we can value Barrick Gold. However, as Barrick Gold isn't expected to produce that much gold in the near future, we would value it using a discount of 15%. Hence, we would use a forward P/E (1yr) of 9.35x.

Using consensus estimates, we value Barrick Gold at $44.97; hence, it’s undervalued by almost 38%. Therefore, it still has a significant upside potential at this point in time.

The Rest of the Gold Industry

The Toronto based gold producer, IAMGOLD Corp (NYSE: IAG) is trading at a forward P/E (1yr) of 8.16x and has a dividend yield of 3.20%. Company’s cash per share stands at $2.43 that is almost 5 times its current dividend; hence, IAMGOLD can grow its dividends in the future without any hassle. Further, a strong current ratio of 4.20 depicts company’s healthy liquidity. However, IAMGOLD has a negative PEG of 2.41; hence, it’s not expected to grow like its top peers in the future. A mean recommendation of 2.7 on the sell side tells the same story. Using earnings estimates, we value IAMGOLD Corporation at $9.94. Therefore, it has an upside potential of almost 25%.

Yamana Gold (NYSE: AUY) recently announced that it expects an output of 1.95 million ounces of gold from its mineral resource at Cerro Moro, Argentina, up 44% from its initial estimate. Yamana Gold is currently trading at a forward P/E (1yr) of 12.49, making it slightly more expensive than its peers. It has a healthy PEG of 1.65 and a PEGY of 1.51. Further, it has a mean target price of $22.57 on the sell side, showing an upside potential of almost 49%. Therefore, it’s one of the top buys in the gold industry at this point in time.

Conclusion

The recent $400 million impairment charge at Barrick Gold’s oil and natural gas business in Reko Diq, Pakistan, and $3.8 billion impairment charge at its copper mine in Lumwana, Zambia have weakened company’s balance sheet to some extent. This in turn means that the company won’t be able to produce that much gold in the near future. Further, the company doesn’t have any plans of growing its mines in the short run and has already given a low estimate for its production in 2013. Therefore, we remain neutral on Barrick Gold in the short run.

As the company has plans of selling its short lived mines with high operating costs, it’s bound to have a positive effect on the company’s productivity. Moreover, further investments in Nevada mean that the company would eventually be able to increase its production in the long run. As the company would be adopting the new all-in sustaining cash cost measure in the future, it will ultimately have a significant effect on lowering its cash costs per ounce of gold produced. Having said this, the Pascua-Lama project, having a mine life of 25 years, is expected to produce high quality of gold at a reasonable cost in the future. The bottom line is that we still remain optimistic about Barrick Gold in the long run. In short, we recommend buying Barrick Gold for long term gains.

 


Vamosrafa7 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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