Gold is up more than 10% year to date, and the price may be poised to climb even higher as fear and volatility creep into the market, riding the coattails of President Trump's low approval rating. So with Warren Buffett's advice in mind to be greedy when others are fearful, let's consider two leading gold miners, Goldcorp (NYSE:GG) and Barrick Gold (NYSE:GOLD), to see which one offers the more compelling argument for investment.
A round of introductions
Goldcorp and Barrick, both headquartered in Canada, are two of the world's largest gold producers. In 2017, Goldcorp estimates it will have 2.5 million ounces of gold production, while Barrick forecasts between 5.3 million and 5.6 million ounces of gold production. Unlike Goldcorp, whose assets -- four mines in Canada, two mines in Mexico, and four mines in Central and South America -- are solely found in the Americas, Barrick has more of a global footprint. In addition to its five core mines found in the Americas, Barrick maintains gold-production assets in Australia and New Guinea.
Since some mines are more profitable than others, it would be reductive to consider Barrick a better choice than Goldcorp solely based on the difference in portfolios. So let's dig a little deeper into these companies by comparing them on some important metrics.
|Company||Market Cap||FY 2016 Revenue||FY 2016 EPS||FY 2016 Operating Margin|
|Goldcorp||$11.9 billion||$3.51 billion||$0.19||10.5%|
|Barrick Gold||$19.2 billion||$8.56 billion||$0.56||31.1%|
Between the higher earnings per share and higher operating margin, Barrick seems to be emerging as the better opportunity, but forming a final decision is complicated and requires closer scrutiny. Taking into account the companies' debt levels and profitability, for example, are also important Things to consider. Could Goldcorp offer a more compelling argument than Barrick, or will further examination prove that Barrick is the better option? Let's continue to dig in and find out.
The case for Goldcorp
After reporting negative free cash flow from 2012 through 2014, Goldcorp has righted its ship over the past two years: In 2015 and 2016, it generated free cash flows of $235 million and $109 million, respectively. Last year, management revealed a five-year plan to drive the company even further in the right direction. For one thing, it expects to grow gold production by approximately 20% from 2016 to 2021 while reducing its all-in sustaining costs (AISC) by 20%. And, with the aim of ensuring growth over the long term, Goldcorp aspires to grow its gold reserves about 20% -- from 42.3 million ounces it reported in 2016 to 50 million ounces by 2021. Barrick Gold, by contrast, doesn't have a well-articulated plan regarding its medium-term growth.
Another feather in Goldcorp's cap is its sound financial position. Whereas Barrick relies more heavily on debt to keep the drills digging, Goldcorp has maintained a more conservative stance with regard to its balance sheet.
Goldcorp has $500 million in debt repayable in March 2018 and the balance of its total debt -- about $2 billion -- due after 2020; consequently, the company can reinvest its cash into various expansion projects in its pipeline, like the Pyrite Leach Project at Penasquito in Mexico, and the Materials Handling Project at Musselwhite in Canada.
The case for Barrick
When evaluating mining companies, one would be remiss to not strongly consider their AISC. Because miners have no pricing power, their profitability largely rests on their ability to control costs -- something at which Barrick excels. From 2013 through 2016, Barrick has effected a more than 20% reduction in AISC. This apparently came as a bit of surprise to management: In 2016, it reported AISC of $730 per gold ounce in 2016, which beat the company's own forecast range of $760 to $810 per gold ounce. Goldcorp, on the other hand, reported AISC of $856 per gold ounce in 2016. With its attractive margin, Barrick Gold, operating in an uncertain political environment where market volatility is likely, is well-positioned to endure -- and possibly prosper -- if there is a downturn in the price of gold. The company, in fact, prides itself on its ability to generate positive free cash flow even when the price of gold falls. In 2016, for example, management reported that it would have continued to generate positive free cash flow even if gold had dropped below $1,000 per ounce. This quality should serve it well as it executes the numerous expansionary projects -- like at Cortex and Veladero -- that it has in its pipeline.
Comparing Goldcorp and Barrick on an AISC basis provides valuable insight, but observing the relationship between their low costs and increased profitability provides a more complete picture.
Over the past year, Barrick has proven to be adept at converting both shareholder equity and invested capital into profits, inspiring confidence that management is moving the business in the right direction. And given that it has forecast that it will maintain AISC at approximately $750 per gold ounce in each of the next three years, management seems poised to continue making effective use of the capital at its disposal.
And the winner is...
Both Goldcorp and Barrick, I believe, offer interesting arguments for investment. But between the two, I think Barrick offers investors the better opportunity at the moment. Goldcorp's strong balance sheet will certainly serve it well in the years to come, but Barrick has been strongly committed to reducing its debt over the past several years. Whereas it ended 2013 with $13.1 billion in debt, it finished 2016 with $7.93 billion; moreover, it plans to reduce its debt even further, targeting $5 billion in debt by the end of 2019. The icing on the cake, though, is Barrick's price tag.
Both in terms of sales and cash from operations, Barrick retains a more attractive valuation. The market, evidently, has baked some high hopes into Goldcorp's stock, while Barrick -- though not in bargain territory -- seems much more reasonably priced.
There's likely to be plenty of market volatility ahead, so moving forward, investors should confirm that Barrick continues to both maintain low AISC and generate positive free cash flow while working toward its debt-reduction target. If it's successful in those tasks, Barrick should be able to weather a downturn as well as any of its gold-mining peers.