Sahil Alvi

Tag: Mining

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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Newmont Mining: A Value Stock in a Growth Sector

by sahilalvi on Jul.31, 2011, under Finance

Newmont Mining - North AmericaWhat gold producer sells at 2 times book value?

Which global miner has the lowest beta among its peer group?

Which resources company trades lower than 12 times its earnings?

The answer: Newmont Mining (NEM).

Newmont Mining — a Gold and Copper exploration and production company with mining operations spanning five continents around the world with “proven and probable gold reserves of 93.5 million attributable ounces, copper reserves of 9.4 billion attributable pounds” and an aggregate land position of approximately 27,458 square miles (71,118 square kilometers).

In 2010, the company had attributable gold sales of 5.4 million ounces and equity copper sales of 327 million pounds. Its recent acquisition of the Conga Project in Peru and Tanami Shaft Project in Australia will be adding “400,000 attributable ounces of gold and up to 100 million pounds of copper production per year” by 2015.

According to Newmont’s website, these were but a few highlights from the company’s performance in 2010:

  • Record revenues of $9.5 billion, up 24% from 2009;
  • Record net cash from continuing operations of $3.2 billion, up 109% from 2009;
  • Gold operating margin increased 30% from 2009 on an average realized gold price increase of 25%.

Pick any one of those highlights and one can assume that the company being discussed is a growth company (with a momentum stock).

The stock, however, has been trading in a fairly narrow 52-week range of $50.05 and $65.50 with a P-E multiple that is more reflective of a value stock.

Is there a reason why it should not break out above its upper limit of the trading range?

According to Vickers Stock Research: “NEM pays an annual dividend of $1.20 which, at its current stock price, produces a yield of 2.16%. This is the largest of any company in the Gold & Silver industry, where the average yield is 1.56%…”

According to a company press release: “The third quarter 2011 dividend of $.30 per share (a 50% increase over $.20 per share for Q2, 2011) was declared in consideration of Newmont’s second quarter 2011 average realized gold sales price of $1,501 an ounce .”

In contrast, the company’s 2010 Gold Operating Margin is $737/oz.

At the time of writing this piece in late July, 2011, Gold has crossed the $1600 per ounce mark and is trading comfortably above that level. In a “risk-off” environment, when Gold keeps breaching its all-time highs on a regular basis, Newmont Mining (one of the largest Gold producers) deserves to enjoy a little more buoyancy in its stock than what it has experienced in the recent past. On the one hand, given its exposure to gold production, Newmont is poised to gain in a continued period of “risk-off,” de-leveraging global economy where fiat currencies are being debased across several major jurisdictions. On the other hand, even in a “risk-on” environment when Copper demand begins to soar again thanks to expansionary tailwinds in a rapidly urbanizing global economy, Newmont — being one of the largest copper producers in the world — is positioned to perform exceedingly well as a “long Copper” play.

At an operating margin of over 42% and a net profit margin of approximately 32%, Newmont is one of the most profitable minerals and metals producers — large or small — in the world. The miner enjoys gross margins that are more than 10% higher than its peer group. Furthermore, Newmont is sitting on cash and cash equivalents of more than $4 billion within an asset base of $25.7 billion.

Over the last 5 years, the company’s Earnings per Share (EPS) has grown a staggering 49.41%.

Newmont Mining - AsiaAt a P-E ratio that is higher only to Freeport-McMoRan (FCX) within its peer group, Newmont is a “value” stock in a growth sector.

Kinross Gold (KGC), for example, trades at a healthy 16.37 its earnings and Goldcorp (GG) trades at almost twice as much as Newmont at a P-E multiple of 22.13. By the time one gets to AngloGold Ashanti (AU), one is looking at an unbelievable P-E multiple of 105.85.

Whether you look at Return-on-equity or Return-on-assets, Newmont ranks among the top 3 of its peer group.

Here’s a tale of relative value analysis that is as stark as it gets for companies that are delivering virtually identical numbers: The company that Newmont resembles most in terms of gross revenues, net profits, net profit margins, and a whole host of other metrics is Barrick Gold (ABX).

Exhibit 1: Profitability

Company

Net profit margin

Gross margin

EBITD margin

Operating margin

Newmont Mining

32.92%

63.48%

53.57%

43.67%

Barrick Gold

29.45%

61.54%

42.56%

42.1%

Here’s a rhetorical question: Which company is more profitable?

Exhibit 2: Debt

Company

Long-term debt to assets

Total debt to assets

Long-term debt to equity

Total debt to equity

Newmont Mining

16.30

17.31

31.34

33.28

Barrick Gold

20.04

20.08

35.03

35.10

Which of these two companies is less indebted?

Exhibit 3: Returns

Company

Return on avg assets

Return on avg equity

Return on investment

Newmont Mining

13.1

19.17

16.27

Barrick Gold

10.65

18.48

11.92

Again, which company provides a higher return?

Exhibit 4: Pricing

Company

P/E ratio

Price-to-

book ratio

Price-to-

sales ratio

Newmont Mining

11.56

2.13

3.33

Barrick Gold

12.4

2.52

4.42

Finally, let us look at the all important metric of reserves:

As of December 31, 2010, Newmont had “proven and probable gold reserves of 93.5 million attributable ounces, copper reserves of 9.4 billion attributable pounds.” Barrick, on the other hand, had “140 million ounces of proven and probable gold reserves. In addition, Barrick has 6.5 billion pounds of copper reserves and 1.07 billion ounces of silver contained within gold reserves.”

Barrick has roughly 50% more gold reserves — which admittedly would allow it to command a premium over Newmont based purely on the metric of gold reserves. Gold, however, is not the complete story. When it comes to copper reserves, Newmont Mining has roughly 1/3rd more than Barrick Gold.

In a certain snapshot in time, if we consider valuations based purely on gold reserves (and silver within it), Barrick should be roughly 50% more valuable as a company. That said, given that Newmont has a third more copper than Barrick, it would recoup approximately 7.5% of the value back (adjusting for the price of copper vis-a-vis gold).

Here’s the clincher: With all these metrics where Newmont beats Barrick Gold consistently (except in the key metric of gold reserves), guess which company is more valuable (as of late July 2011)?

It is Barrick Gold at $47.54 billion.

And, what’s Newmont Mining’s market cap?

$27.45 billion.

So, the market is placing 75% more value on Barrick Gold than it does on Newmont Mining. It is established, however, that even when considering mining reserves as a sole determinant of value, Barrick is a little over 40% more valuable than Newmont.

So, which company would you pick based on the above valuations? What company’s stock would have greater upside potential?

In conclusion, one can’t help but wonder: Is Newmont undervalued…by as much as 35% or more?

Seth Klarman: How’s that for margin of safety?

Michael Burry: Is this enough of a value stock for you?

Need one say (or question) more.

Sources: Reuters, Google Finance, Vickers Stock Research, Cooper Financial Research, Barrick Gold, Newmont Mining.

Disclosure: The author owns a long position in the company. All data has been sourced from publicly-available sources.

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