It is crisis time in the Eurozone and elsewhere. Stock markets will crash at least as hard as in 2008 when Europe goes into recession. Gold is a crisis hedge, but it drops in a stock market crash also (just not a badly). And gold mining stocks are a great performing asset, but only after most of the stock market crisis has passed because the world is dominated by Keynesian economics. The financial media, government technocrats, and almost all PhD economists practice the voodoo economic religion of Keynesian economics. Keynesian investors flee stock markets in a panic and run to US government bonds. Bonds are bought in dollars. Demand for dollars increases, demand for gold drops. This is an opportunity of immense proportions if you keep your powder dry.
It is gold miners week at www.myhighdividendstocks.com, but not because gold miners are high dividend stocks. Most are no or low dividend stocks. However, gold mining stocks will offer some huge capital appreciation potential once the US and European stock markets crash again. Every central bank in the world is printing money (Dollars, Euros, Yen, Pounds, and Yuan) and the commodity gold is priced in fiat currencies, so as more money is printed the price of gold expressed in fiat currencies goes up. It really is that simple. Gold mining companies can increase their profit margins when the cost of extracting gold from the Earth’s crust goes up a little and the price of gold goes up a lot. But gold mining companies tend to be more volatile than the price of the underlying commodity. They amplify gold’s gains and losses as you will see below.
So what is the best price for several of the gold majors that offers capital preservation and maximum opportunity for capital appreciation with maybe some dividends thrown in for good measure? That’s what I hope to find out this week for you and I.
Next up is Barrick Gold (ABX)
Morningstar’s take: Barrick is the world's largest gold producer. The company has middle-of-the-pack operating costs and is growing production by working on two megaprojects: Pueblo Viejo in the Dominican Republic and Pascua-Lama on the border between Argentina and Chile. Production is heavily weighted toward the Americas, where costs and political risks tend to be lower.
Barrick is the world's largest gold producer. In 2010 the firm produced 7.9 million ounces of gold and 368 million pounds of copper. North America accounted for 43% of gold production, South America for 27%, Australia/Pacific for 25%, and Africa for 9%. As of Dec. 31, 2010, Barrick had 140 million ounces of proven and probable gold reserves. Barrick's flagship Goldstrike property produced 1.24 million ounces of gold in 2010. The firm has 25 operating mines.
Share price: $50.33
Shares: 999.80 million
Market capitalization: $50.32 billion
Bonds: Barrick has some big bonds coming due in 2013 although this miner is not overly indebted.
DIVIDEND RECORD – Barrick has only started paying a quarterly dividend since the second half of 2010. It just increased its quarterly dividend from $0.12 to $0.15 per share in its most recent quarter.
Dividend: $0.15 per share quarterly ($0.60 annually)
Dividend yield: 1.2% ($0.60/$50.33 share price)
Dividend payout ratio: 12% - 50% depending on how you calculate ($0.60/$4.86 expected 2011 EPS = 12%) or ($0.60/$1.21 average adj. earnings = 50%)
EARNING POWER - Six year average adjusted earnings = $1.21 @ 999.8 million shares
(Earnings adjusted for changes in capitalization)
EPS Net inc. Shares Adj EPS
2006 $1.77 $1,506 M 851 M $1.51
2007 $1.28 $1,119 M 874 M $1.12
2008 $0.89 $785 M 903 M $0.79
2009 ($4.73) ($4,274 M) 903 M ($4.27)
2010 $3.28 $3,274 M 987 M $3.27
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2011 Q1 $1.00 $1,001 M 999 M $1.00
2011 Q2 $1.16 $1,159 M 1,001 M $1.16
2011 Q3 $1.36 $1,365 M 1,001 M $1.36
2011 Q4 $1.34 E $1,339 M E 999.8 M $1.34 E
Six year average adjusted earnings = $1.21 @ 999.8 million shares
Source: 2011 Q4 consensus estimate $1.34 per share according to Reuters.com
Consider contrarian buying at $9.68 (8 times avg. adjusted EPS)
Consider value buying at $14.52 (12 times avg. adjusted EPS)
Consider speculative selling at $24.20 (20 times avg. adjusted EPS)
Barrick is trading at 41.6 times avg. adjusted EPS. This is highly speculative pricing.
BALANCE SHEET – Barrick has a decent balance sheet, but I don’t like their rising debt.
Book value per share: $22.38
Price to book value ratio: 2.24 (not so good; $50.33 share price/ $22.38 BV per share)
Current ratio: 2.27 latest quarter (over 2.0 is good)
Quick ratio: 1.18 latest quarter (over 1.0 is good)
CONCLUSION - Barrick bottomed in the $19.80 dollar range in October 2008 several months before the US stock market bottom in March of 2009. That represented the best value entry into Barrick since late 2008. The gold price will go down at least half of the percentage of the stock market’s decline. This happened in 2008-2009. US stocks dropped about 50% and gold dropped about 25%. However, Barrick dropped even more than the broader market or gold. It dropped almost 63% from $53.31 in March of 2008 down to $19.89 by October 2008. Don’t think that it happen again. Wait for another bottom near value territory at $14.52 per share. Barrick would be yielding about 4.1% if it keeps its new dividend rate at such a low price. The good news is that gold will continue to go up in price as the world’s sovereign debt crisis worsens, but you have to buy extremely low to preserve your capital when purchasing mining stocks.
DISCLOSURE – I don’t own Barrick Gold (ABX).
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