Sahil Alvi

Tag: Latin America

Barrick Gold: Gold Medalist among Gold Miners

by sahilalvi on Aug.29, 2011, under Finance

Pascua-LamaBarrick Gold: World’s Largest Gold Miner and Producer

With 140 million ounces of proven and probable gold reserves and 7.8 million ounces of gold production, Barrick Gold (NYSE: ABX) (TSE: ABX) is simply the world’s largest gold exploration and production company.

Much has been said about gold as a prime “haven” asset to protect against the global macro-economic and geo-political vicissitudes of our times. With its size, experience, expertise and resources, Barrick Gold is positioned extraordinarily well to capitalize on this theme of gold reigning supreme on world markets on a secular basis.

As of December 31, 2010, the company also held 6.5 billion pounds of copper reserves and 1.07 billion ounces of silver contained within gold reserves. In July, 2011, “Barrick acquired Equinox Minerals which adds a further 4.5 billion pounds of copper reserves from the Lumwana mine and 1.2 billion pounds of copper reserves from the Jabal Sayid project.”

To cite a few highlights from Barrick’s 2010 annual report:

  • Record adjusted net income from $1.81 billion in 2009 to $3.28 billion in 2010
  • Record adjusted operating cashflow from $2.90 billion in 2009 to $4.78 billion in 2010
  • Increased dividend by 20% from $0.4/share in 2009 to $0.44/share in 2010
  • Record realized price of gold from $985 per ounce in 2009 to $1,228 per ounce in 2010
  • Industry’s only ‘A’ credit rating.

When it comes to profitability, using 2010 figures, Barrick generated operating margins of 42.1% and net margins of 29.4% — numbers that would be the envy of companies in any industry – including the basic materials sector. In 2011, the company’s performance has further improved. Its gold margins on a net cash cost basis have improved by an impressive 32% from a Q1, 2010 figure of $821/oz. to Q1, 2011 figure of $1081/oz. The company’s realized gold price has improved year-over-year by 25% from $1,114/oz in Q1, 2010 to 1,389/oz in Q1, 2011.

Infact, as we speak, Barrick’s Q2 results have shown a further improvement in net margins of another 500 basis points over last year’s results in a markedly slowing global economy.

PierinaWhile, at approximately $1800 an ounce, a section of the investment community may argue that gold is a “crowded trade.” On an inflation-adjusted basis, however, the precious metal needs to climb up to US$ 2300 to 2500 per troy ounce before it even reaches its all-time highs. So, at circa $1800/oz., we are nowhere near gold’s all-time peak yet.

Barrick Gold, at 13 times last year’s earnings per share, is still reasonably priced for being the world’s largest miner and producer of – arguably – the world’s most sought after commodity at the present time. So much so that, despite having better fundamentals than its competitors across a variety of metrics, the stock trades at a healthy discount vis-à-vis its peer group (except Newmont Mining which trades modestly lower than Barrick at 12.9 times trailing earnings; please read my previous post on Newmont Mining: here).

Here are a few valuation data for Barrick vis-à-vis its peer group:

Company

Barrick Gold

Newmont Mining

AngloGold Ashanti

Goldcorp

Kinross Gold

Ticker Symbol

(NYSE: ABX)

(NYSE: NEM)

(NYSE: AU)

(NYSE: GG)

(NYSE: KGC)

Price-Earnings Ratio

13.2

12.9

21.1

24.1

16.6

Price-Book Ratio

2.5

2.2

4.1

1.9

1.4

Price-Sales Ratio

4.4

3.4

3.1

10.5

6.3

 Looking at the above P-E multiples, Barrick is trading at roughly half to one-quarter less than its smaller rivals such as Goldcorp, AngloGold Ashanti and Kinross Gold. On Price-to-Book and Price-to-Sales metrics, Barrick places well in the middle of the rankings versus its peers.

According to Ford Investment Research: “…Barrick Gold Corp.’s earnings have increased from $2.90 to an estimated $4.32 over the past 5 quarters, they have shown strong acceleration in quarterly growth rates when adjusted for the volatility of earnings. This indicates an improvement in future earnings growth may occur.”

What this also means is a positive momentum in the stock price of the company.

Crucially, from a shareholder’s perspective, the company improved its Return-on-Equity from 12% in 2009 to 19% in 2010.

Switching gears to industry challenges: One of the biggest issues facing the precious metals industry is the ability to replenish its reserves. Barrick Gold has done an admirable job in this department. In the company’s President & CEO – Aaron Regent’s words: “The Company has consistently replaced its reserves in each of the last five years, and we did so again in 2010. Gold reserves now stand at about 140 million ounces, the largest in the industry. In addition, measured and indicated gold resources grew 24% to 76 million ounces and inferred gold resources increased by 18% to 37 million ounces. Complementing our gold reserves and resources are 6.5 billion pounds of copper reserves, 13.0 billion pounds of measured and indicated copper resources and 9.1 billion pounds of inferred copper resources, plus 1.1 billion ounces of silver contained within gold reserves.”

So, one can safely assert that Barrick is doing a competent (if not a stellar) job in replenishing its reserves in a fiercely competitive, capital-intensive environment where transformational discoveries of new mines is more an exception than a norm.

Pueblo ViejoWhat also, often goes, unnoticed is Barrick’s significant presence in the global copper market. While 4/5th of Barrick’s revenue contribution comes from gold, roughly 20% of its top-line comes emanates from copper sales. In a rapidly urbanizing world – particularly among the growth economies of Asia, Middle East and Latin America – copper will continue to enjoy robust demand across myriad industries from infrastructure to construction to electrical equipment, among others. Game-changing copper reserves, on the other hand, have not come online for a significant period of time. Hence, outlook for copper is bullish beyond the short-to-medium term window while the Eurozone sorts out its sovereign debt issues and the emerging economies take a breather from a decade long spate of high single-digit GDP growth.

In a period fraught with geo-political unrest in many parts of the world, Barrick enjoys a distinct advantage over other miners by having majority of its reserves and production capabilities located in politically stable parts of North America, Latin America and Australia/Pacific. Furthermore, its geographic presence is well-diversified to hedge against concentration risk as well as from a potential fall-out from “nationalization” of mining assets in any one part of the world.

Looking out into the future, the company is aiming for a gold production target of 9 million troy ounces by 2015. Assuming such production growth occurs on a linear basis, this target represents a modest increase of 300,000 ounces a year from its current level of 7.8 million ounces. The company is not resting on its laurels either; in order to continually strengthen its pipeline of reserves, Barrick’s 2011 exploration budget has increased to $320-$340 million.

Ultimately, Barrick trades in commodities that provide tangible sources of stability and security on the one hand (gold) and growth and development on the other (copper). So, whether one is bullish or bearish on the outlook for the global economy, at less than $50 a share, the stock is a “Buy” over the next 6 to 12 months.

Sources: Barrick Gold, Ford Investment Research, Google Finance.

Images Courtesy: Barrick Gold.

Brokerage: TD Ameritrade & Interactive Brokers.

Disclosure: The author plans to initiate a long position in the company’s stock within the next month. All data has been sourced from publicly-available sources.

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Vale: The performance and promise of Brazil and Basic Materials packed into one

by sahilalvi on Dec.04, 2010, under Economics, Finance

Vale

According to the company itself: “Vale is the world leader in iron ore and pellet production and the second biggest nickel producer.”

Coming out of The Great Recession, Vale (NYSE: VALE) is poised to gain from expansion of the manufacturing base — particularly in markets like China, India, Asia-Pacific, Middle East, and Latin America. The second-biggest miner in the world already, Vale has a growing global footprint of 38 countries with an exposure to most of the world’s high growth markets — not in the least its home country of Brazil.

Furthermore, there are very real geological and geo-political constraints on the supply of minerals Vale (or any of its competitors) can extract, process and sell on the world markets. This demand-supply dynamic has both secular as well as a cyclical themes interwoven. Hence, the global demand-supply dynamic for Vale’s products bodes well for the company’s growth prospects and profit margins for a long-time to come.

Vale is also showing an enormous appetite for bottom-line results with Net Profit Margin almost doubling from a 2009 margin of 21.6% to the Q3, 2010 figure of 40.9% . Even as of 2009, the company was only 310 basis points (in net profit margins) behind the industry’s most profitable of the large mining and metals companies: BHP Billiton.

Vale’s Net Profits are just as noteworthy because the Brazilian company generates revenues that are approximately half compared with another industry leader Rio Tinto — whose top-line figure for 2009 was US$ 41.8 billion compared to Vale’s US$ 23.3 billion. Yet, Vale’s 2009 Net Profits were US$ 5 billion compared with Rio Tinto’s US$ 5.8 billion — which makes Vale’s profits merely 15%  less that that of Rio Tinto’s.

In light of the positive fundamentals, the company is on massive expansion drive with a planned capital outlay of US$ 24 in 2011 alone. To contextualize Vale’s ambitious growth plans, Xtrata — the Anglo-Swiss rival has planned capital outlays of US$ 23 billion over 6 years from 2011 through 2016.

In
2009, Chinese demand represented 68% of global demand for seaborne iron ore, 44% of global demand for
nickel, 39% of global demand for aluminum and 40% of global demand for copper. The percentage of our
operating revenues attributable to sales to consumers in China was 38% in 2009.

There are — however — large, concentrated, inter-connected and material risks to Vale’s growth story. Two that are particularly noteworthy:

1. China, and

2. Steel.

According to Vale’s 2009 annual report:

“In 2009, Chinese demand represented 68% of global demand for seaborne iron ore, 44% of global demand for nickel, 39% of global demand for aluminum and 40% of global demand for copper. The percentage of our operating revenues attributable to sales to consumers in China was 38% in 2009.”

If China slows down, Vale’s (and most metals and mining companies’) revenues and profits decline. Furthermore, the company’s heavy exposure to the global steel market makes it vulnerable to fluctuations in the fortunes of this industry — particularly from a downstream steel consumption perspective in industries like infrastructure, transportation, construction and real estate.

The annual report goes on to say:

“Iron ore and iron ore pellets, which together accounted for 59% of our 2009 operating revenues, are used to produce carbon steel. Nickel, which accounted for 14% of our 2009 operating revenues, is used mainly to produce stainless and alloy steels…The prices of different steels and the performance of the global steel industry are highly cyclical and volatile, and these business cycles in the steel industry affect demand and prices for our products.”

There are other lesser risks such as:

  • Price volatility of nickel, copper and aluminum that are actively traded on global commodity markets;
  • Capacity expansion gestation periods and consequent constraints to meet demand in the short-to-medium term;
  • Geo-political considerations given that many of the mineral-rich countries have unstable political and regulatory regimes.

All that said, the company has a growing and diversified geographic market with 50% of its sales coming from the growing continent of Asia. Vale also has a swath of valuable mines being developed in resource-rich Latin America, Africa and Central Asia, among other mineral-rich locations around the world. Over several decades, the company has developed an extensive, defensible, and hard-to-replicate production and distribution capability — again with a global span. With the insatiable demand for basic materials in developing and frontier markets, Vale is a growth story based on strong fundamentals.

Not to mention, given the company’s healthy cash flow generation capability, Vale can be expected to pay out steady dividends in the forthcoming years.

As of December 3, 2010, Vale’s ADR (NYSE: VALE) traded at approximately 14.2 times earnings compared with its other global metals and mining peers’ ADRs:

  • Rio Tinto (NYSE:RIO): 14.9
  • BHP Billiton plc (NYSE:BBL): 16.8
  • BHP Billiton Ltd (NYSE:BHP): 19.5
  • Xstrata (LON:XTA): 29.1
  • Anglo American plc (PINK:AAUKY): 40.2

Since I added Vale’s ADR to my simulation portfolio on Sept 17, 2010, the position has gone up by 23% in merely two and half months (as of Dec 3, 2010).

Moreover, it is a highly liquid ADR — consistently ranking as one of the highest traded ADR’s on NYSE.

The target P/E one could set for the ADR is a value of 20 times its earnings per share compared with its current P/E of 14.2. Even at a P/E of 20, it is worth “taking stock” (no pun intended) rather than sell-off the entire position.

Given Vale’s exposure to the twin forces of Brazil’s breathtaking economic expansion coupled with the insatiable global demand for minerals and metals that Vale produces, the company’s stock and ADR are poised for a significant upside.

In essence, Vale is really a “buy and hold” play over the medium-to-long run.

Disclosure: The author owns no stock of Vale and has written this research note purely based on publicly available information.

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