It's no secret that when fear creeps into the marketplace, many investors turn to gold. So far, 2018, has proven no different. While the dollar has dropped about 2.5%, the price of gold has risen more than 4%. It should come as no surprise, then, that gold-oriented stocks like Barrick Gold (ABX 1.56%) are receiving increased attention. Gold is hardly the only thing Barrick digs out of the ground; the company's also involved in the production of copper and silver. Similarly, Freeport-McMoRan (FCX 0.61%) is another mining company with exposure to numerous minerals, including gold and molybdenum, though it's copper that's primarily responsible for putting the green in its pocket.
Let's dig in and get to know these companies better to see which one presents investors with the better buying opportunity.
Image source: Getty Images.
Getting to know you
The self-proclaimed "premier publicly traded copper company," Freeport-McMoRan's portfolio includes 11 copper- and molybdenum-producing mines in the Americas in addition to Grasberg -- one of the world's largest copper and gold deposits -- located in Indonesia. One of the largest gold-mining companies by market capitalization, Barrick Gold has been digging the yellow stuff out of the ground since 1983. The company's portfolio is comprised of five core mines found in the Americas, gold-production assets in Australia and New Guinea, and three copper-producing mines found on three different continents.
With an elementary understanding of the companies based on their portfolios, let's become better acquainted by comparing them on some important metrics.
| Company | Market Cap | FY 2017 Revenue | FY 2017 EPS | FY 2017 Free Cash Flow |
|---|---|---|---|---|
| Freeport-McMoRan | $25.4 billion | $16.4 billion | $1.25 | $3.3 billion |
| Barrick Gold | $14.5 billion | $8.37 billion | $1.23 | $669 million |
Data source: Company filings and Morningstar.
A cursory glance at the two businesses may suggest that Freeport-McMoRan is the better opportunity. Nearly doubling the revenue Barrick generated in 2017, Freeport-McMoRan churned out nearly five times as much cash as Barrick. But it would be reductive to declare Freeport-McMoRan the better opportunity based solely on these figures, so let's dig in even deeper before arriving at a decision.
Digging out of debt
Working to improve its financial health, Barrick Gold has made a concerted effort over the past few years to shore up its balance sheet. Since the start of 2015, for example, the company has reduced its total debt by approximately $6.7 billion, and it intends to reduce it another $1.4 billion by the end of 2018. Illustrating the success of the debt-reduction initiative, Barrick's net debt-to-EBITDA ratio at the end of 2017 was 0.84, a reduction from the 1.41 it sported at the end of 2016. Freeport-McMoRan, on the other hand, ended 2017 with a net debt-to-EBITDA ratio of 1.61.
ABX Debt to Equity Ratio (Annual) data by YCharts.
To find further evidence of Barrick's more conservative stance with regard to its balance sheet, we can look to two more metrics: the debt-to-equity ratio and debt to capital. In doing so, we find that Barrick is in a much sounder position, leaving it better-suited to withstand sharp declines in the prices of gold and copper. Moreover, the company can reinvest its cash in various expansion projects like the Phase 5 leach pad expansion at Veladero.
Uncertainty in Indonesia is certainly a worry
Freeport-McMoRan's higher debt level, in and of itself, doesn't raise a red flag; however, it becomes a concern when taking into account the company's premier asset, Grasberg. How important is the mine to Freeport-McMoRan's operations? In 2017, the Indonesian asset accounted for $1.29 billion in revenue from copper sales; the company's North American copper mines and South American copper mines provided revenue of $4.22 billion and $3.67 billion, respectively. But Grasberg's importance transcends copper; the deposit represents 99% of the company's proven and probable gold reserves.
However, 2018 may prove to be a lot less lustrous for Grasberg. The company is currently at odds with the Indonesian government regarding the mine, suggesting that the company's long-term stability in the country is far from a certainty. Management remains optimistic that the dispute will be resolved, but optimism hardly equates to a guarantee.
As for Barrick Gold, there doesn't appear to be any comparable uncertainty regrading its operations abroad.
Checking the price tag
Barrick Gold seems to have the edge, but let's see how the two stocks' valuations stack up against each other. Trading at less than seven times trailing earnings, Barrick Gold seems like a bargain compared to its five-year average trailing PE ratio of 11, according to Morningstar. It even seems even more alluring in light of Freeport-McMoRan, which trades at almost 15 times trailing earnings. To provide additional insight, let's consider the valuations of the two stocks in terms of operational cash flow. Barrick currently trades at 6.6 times cash flow, while Freeport-McMoRan trades at a 5.5 multiple. Although it may appear slightly more expensive, it hardly seems to be a price that would tip the scale in Freeport-McMoRan's favor.
And the winner is...
Due to a more secure financial position, greater stability in its operations, and reasonable price tag, Barrick Gold appears to be the more compelling opportunity at the moment. Moving forward, investors should keep a keen eye on the prices of copper and gold in addition to the companies' handlings of their debt and the situation in Indonesia -- all dynamics that could drastically change the thesis for either company.
