The stock prices of Freeport-McMoRan Inc. (NYSE:FCX) and Barrick Gold Corporation (NYSE:GOLD) have rebounded strongly since commodity prices started to recover in early 2016. That shouldn't be surprising, since this pair of miners is focused on pulling copper and gold out of the ground. But which one is the better buy today?
Copper and gold miner, or is it gold and copper miner?
Although Freeport and Barrick mine the same commodities, one of the biggest differences between them is their focus. In 2017, copper accounted for roughly 75% of Freeport's top line, with gold making up just 12% (the rest is mostly molybdenum). Barrick flips that equation, with gold at 90% of 2017 revenue and copper at a meager 7%. So before you consider investing in either company you need to make sure you understand that the commodity sectors on which they focus are different.
That's not a small issue. Copper is an industrial metal that is used in just about everything, from the buildings we live and work in to the electronic gadgets we carry around in our pockets. Demand for copper is driven by economic growth and investors tend to view copper as something of a proxy for that growth.
Gold, on the other hand, is a store of wealth used mainly for jewelry and investment (bullion, for example). Gold is generally favored when investors are worried about the economy or the stock market. This can lead to very different performances for the miners who dig the metals up, as the chart below shows. During the last recession Barrick fell 15%, much better than the S&P 500's 36% decline and Freeport's 45% drop.
In fact, you could look at gold as the half-empty investment glass and copper as the half-full investment glass. Moving beyond this big picture view, however, you also need to consider how well each company runs its business.
Producing better results
Since commodity prices started a broad-based recovery in early 2016 both Barrick and Freeport have seen their results improve. However, Barrick's EBTIDA margins have been higher than Freeports throughout the rebound, and by a wide margin. For example, Barrick's EBITDA margin was roughly 60% at the end of 2017 compared to Freeport's roughly 33%. Barrick wins hands down on this metric of performance.
That said, looking at return on invested capital and return on capital employed provides a little promise for Freeport. Barrick's returns here had been higher through the recovery but Freeport appears to be narrowing the gab and catching up. That bodes well for Freeport's future performance and shows that both are doing at least a roughly equal job when it comes to investing their shareholders' cash. We'll call this a wash, but give some kudos to Freeport for improving results.
Leverage is also an interesting issue to consider. Both companies have been working hard to reduce their debt loads. And, as of the end of 2017, their debt to equity ratios were in the same ballpark at 0.35 for Barrick and 0.43 for Freeport (down from around 1.2 and 1.6, respectively, at the end of 2015). However, when it comes to the ability to handle that debt, Barrick's debt to EBITDA ratio of 1.5 times is much better than Freeport's 2.7 times. This one goes to Barrick, even though it has to be noted that both have made notable progress on the leverage front over the past two years or so.
The last point of comparison here the dividend. Barrick increased its disbursement by 50% in early 2017 and now pays a quarterly dividend of $0.03 a share per quarter. That's not much (Barrick's yield is 0.95%), but it's worth highlighting that the gold miner didn't resort to eliminating its dividend during the commodity downturn like Freeport did. Freeport's cut was ultimately the result of an ill-timed acquisition that didn't pan out as planned. That said, Freeport recently announced that it was resuming its dividend at a quarterly rate of $0.05 per share. That equates to a 1.1% yield based on Freeport's recent stock prices. Still, the big takeaway is the fact that Barrick kept rewarding investors with dividends during a rough patch while Freeport did not. This comparison goes to Barrick Gold.
Summing it up, I would favor Barrick over Freeport today. But there's still one more reason to avoid Freeport if you are a conservative investor.
A lingering overhang
In 2017 Freeport and the Indonesian government started to spar over the ownership of the massive Grasberg Mine. Indonesia wants to benefit more than it has historically from the mine, which inherently means that Freeport will benefit less. This is a big deal because Grasberg accounts for roughly 30% of Freeport's copper reserves and virtually all of its gold reserves.
The two sides have worked out a broad framework for an agreement, but have yet to iron out the details. They hope to have a final deal by the end of the first half of 2018, but what that will mean for Freeport is a big question mark right now. Until this issue is put to rest, conservative investors are better off on the sidelines.
Although I would personally favor a different way to invest in gold over a miner like Barrick, when looking at this pair, I think the gold miner is the more compelling option today. It's business is performing better, it is better positioned to handle the leverage it has, and the miner has consistently rewarded investors with dividends even when times got tough -- showing a commitment to stockholders that Freeport did not (or, more to the point, could not). Freeport is showing improvement on each of these points, and is doing a roughly equal job in investing its shareholders' capital, but when you add in the uncertainty associated with the giant Grasberg mine it is probably best to err on the side of caution here.