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Inflation Doesn’t Scare This Gold Miner

While I understand the difficulties that companies face from rising costs, my fingers can't help but grow weary from typing that very phrase: rising costs.

While the responsible investor can't escape the topic -- as few companies are immune -- one company has provided a welcome respite from the litany of complaints. Barrick Gold (NYSE: ABX  ) delivered golden earnings for the second quarter, with net profit rising 22% to $485 million. Revenue reached the $2 billion mark on gold sales of 1.86 million ounces.

The average realized gold price was $894 per ounce, 43% higher than a year earlier. While mining costs rose 23% to $417 per ounce, the result came in below the $440 reported by fellow gold giant Newmont Mining (NYSE: NEM  ) .

In the first optimistic comment about rising costs that I've encountered to date, Barrick CEO Peter Munk had this to say in the earnings release: "There has been a lot of focus on rising costs in the gold industry, but perhaps we sometimes forget that these rising energy costs and inflationary expectations are one of the reasons for the move in the gold price above $900 per ounce that we are currently enjoying."

He's right, of course. The same inflation that imperils many companies with relentlessly shrinking margins is precisely that which drives the price of gold higher. Over time, the market helps takes care of pushing the gold price up to reflect the cost of mining the metal.

Interestingly, Barrick raised $150 million in capital by selling gold royalties on 77 properties to a company that specializes in such assets: Royal Gold (Nasdaq: RGLD  ) . In the broader context, I believe major miners like Barrick, BHP Billiton (NYSE: BHP  ) , and Rio Tinto (NYSE: RTP  ) will likely convert cash flow to acquisitions in an effort to replenish reserves for the long haul.

Further Foolishness:

The "Gold" tag within the Foolish universe of Motley Fool CAPS lists 85 companies. Join the CAPS community to separate the Fools' picks from fool's gold. It's free and fun!

Fool contributor Christopher Barker captains yachts and writes about stocks. He can also be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Royal Gold and BHP Billiton. The Motley Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 02, 2008, at 10:57 AM, XMFSinchiruna wrote:

    After further contemplation, review of Barrick's hedge book position of 9.5 million ounces of gold, and the continued questions regarding massive insider sales of shares back in January, I would like to add to the above article a red flag of caution to investors regarding Barrick!

    Though their recent results are impressive and some recent moves very intriguing, I continue to believe Barrick is to be avoided.

    Here is my blog post from January regarding insider sales of shares... several high-ups brought their positions to zero... and I've been unable to find an update on current insider holdings:

    And this is the explanation of the company's hedge book from their website. 9.5 million ounces of forward sales with an estimated average realizeable price of $423 per ounce... that is a terrible position to be in!

    I revert back to what I've said before, their shares may well appreciate substantially, but I will never climb aboard. That hedge position is just too heavy a burden.

    There are too many great gold miners out there to take that kind of risk.

    Here's my article from May which contains a siilarly cautious tone:

    Fool on!

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10/25/2016 4:00 PM
ABX $16.89 Up +0.36 +2.18%
Barrick Gold CAPS Rating: ***
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RTP.DL $0.00 Down +0.00 +0.00%
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