The metals and mining industry may not be out of the woods yet, but stocks like Barrick Gold (NYSE:GOLD) have defied all odds by nearly tripling in one year. Investors in a company like Alcoa Inc. (NYSE:AA), on the other hand, have had to do with only about 9% gains in a year. The commodities, or more precisely, metals, that the two companies deal in make all the difference: While Alcoa mines bauxite to produce aluminum, Barrick Gold is, as the name suggests, a gold miner.
If you were to invest in one of these industry giants today, which one should it be? The answer might surprise you.
The case for Barrick Gold
Investors flock to gold for safety during times of economic uncertainty. The Brexit vote is a fine example, when gold prices jumped to multiyear highs on surging demand. As gold shot up, so did Barrick shares in anticipation of higher profits at the miners as gold prices rise.
But there's another reason Barrick is the favorite among the lot: It is the lowest-cost gold producer among peers as measured by all-in-sustaining cost, or AISC. In its most recent quarter, Barrick reported AISC of $782 per ounce of gold and lowered its full-year AISC guidance in Q2 to $750-$790 per ounce. Now compare that with Newmont Mining's $876 an ounce, or Goldcorp's $1,067 an ounce of reported AISC in their respective second quarters, and you know why Barrick stands out. In an industry where revenues can be highly unpredictable, being the lowest-cost producer is perhaps the biggest competitive advantage.
A combination of higher gold prices and lower costs should help Barrick break even. The miner hasn't turned a profit since 2011, when gold prices crashed. It has been a tale of multibillion-dollar writedowns and swelling debt since. But Barrick's renewed focus on deleveraging its balance sheet while improving efficiency is reflecting in its numbers: The miner has cut down debt by more than $4 billion since 2014 largely by divesting non-core assets. You'd be surprised to know that Barrick was also free cash flow positive last year despite losses to the tune of $2.8 billion. As long as gold stays above $1,000 per ounce, Barrick should remain free cash flow positive.
Long story short, Barrick remains the best gold stock out there, and it should continue to be so as long as the yellow metal doesn't lose its shine.
The case for Alcoa
Alcoa didn't make a profit in 2015, but unlike Barrick, it was profitable in three out of the past five years. That's because Alcoa isn't a boring, traditional aluminum company anymore, and nothing could validate that more than its move to split itself in two this year. The rationale behind the split is unquestionable: Alcoa is separating its upstream bauxite (aluminum) mining business, which has suffered the blows of plunging commodity prices, from its value-add business, which manufactures parts and supplies for high-potential industries like aerospace and automotive. In the end, shareholders should benefit.
Alcoa's operational performance so far this year is already signaling a turnaround. The company has more than doubled its net profits during the first six months, backed by a 17% decline in its selling, general, and administrative expenses. In other words, Alcoa isn't betting on just aluminum prices -- which are still significantly below their 2011 levels despite substantial recovery in the past year -- to make money. It is restructuring operations, improving efficiency, and disposing non-profitable assets to emerge a leaner and stronger company when the cycle turns. Just to give you an idea, Alcoa is planning to raise $1.2 billion in proceeds this year through the sale of non-core assets.
Meanwhile, Alcoa's value-add business -- to be known as Arconic post-split -- is making big strides thanks to aluminum catching the attention of automotive and aerospace industries. Consider that Alcoa has bagged aerospace contracts, including several from Boeing and Airbus, worth a whopping $10 billion in just the past year. Another example is Alcoa's deal with Ford (NYSE:F) to develop advanced aluminum alloy for the automaker's top-selling F-150 pickups.
As the market leader, Alcoa is poised to benefit tremendously as aluminum makes its way into newer applications while prices bottom out.
Barrick's astounding stock performance could easily make one greedy, but it could turn as ugly if gold prices were to fall. Gold may be a safe-haven investment, but there's little safety in a gold stock, because it's almost impossible to predict where gold prices are headed. It doesn't help that more than half the global demand for gold is driven by jewelry, which tends to fluctuate.
Demand for aluminum, on the other hand, is driven by its myriad uses in nearly every key industry. The biggest catalyst for Alcoa, of course, is the transportation industry, which is scrambling to reduce emissions and improve fuel efficiency. Aluminum's weight and strength serve the purpose well.
The choice is simple: Alcoa's business is undoubtedly more secured and attractive than Barrick's, and that's all that should matter to a prudent long-term investor.