Gavin Graham has enjoyed a long and successful career in money management and is a specialist in international securities. Here, the contributing editor to Internet Wealth Builder makes the case for owning gold and reviews a favorite idea among mining stocks.
Inflation rates continue to rise to levels not seen for a decade or more. US CPI exceeded 5% for the third month in a row in August. In Canada, August’s CPI showed a 4.1% jump from last year at the same time.
US core inflation, which excludes food and energy, apparently on the assumption that consumers don’t need to eat or heat or cool their property or drive anywhere, is still running over 4%.
What has been puzzling to investors is gold’s dismal price performance over the last year. Gold is traditionally regarded as a safe haven when inflation is rising. But this time around, gold seems to be missing in action.
Gold briefly top $2,000 per oz. last summer and it’s now back below $1,800. Miners have done even worse, even though they have been recording substantial increases in profits.
Any well diversified portfolio should contain assets that are non or negatively correlated with other asset classes to both reduce volatility, and to improve overall returns if one major class is suffering. Gold has preserved its purchasing power over the last three millennia, unlike cryptocurrencies, which have barely a decade of history.
With gold down almost 10% and gold miners off over 25% in the last year, despite excellent results, now is a good time to either establish or increase a position in the sector.
Barrick Gold (GOLD) is the second largest gold miner by market capitalization ($44 billion) after Newmont Mining (NEM). After the reverse takeover of Barrick by Randgold Resources in 2018, Randgold's CEO Mark Bristow has transformed the group, reducing debt from $2.2 billion at the end of 2019 to net cash, partially through $1.5 billion of disposals such as the Massawa mine.
In 2020, Barrick produced 4.75 million oz. of gold, down from 5.26 million due to the disposals, at an AISC of $967 per oz. Adjusted net income after charges in debt reduction and exchange movements more than doubled to $2.04 billion ($1.15 per share) from $905 million ($0.51 per share). Barrick reports in U.S. dollars.
Barrick, like Agnico, has fallen almost 40% from its high of $39.95 last September, against an 8% decline for gold itself. This is despite gold production for 2021 that is forecast to remain near the 4.7 million oz. produced last year and copper production of over 450 million lbs. in addition to its gold output.
The new $1 billion mine at Goldrush in Nevada and the $1.3 billion mine at Pueblo Viejo in the Dominican Republic will continue Barrick’s track record of more than replacing its production over the next few years.
Barrick pays a quarterly dividend of US$0.09 per share ($0.36 a year), giving it a running yield of 1.96%. But it has paid two special dividends of $0.14 per share for the last two quarters to return capital from its disposal program, with the second paid Sept. 15. A third special dividend will be paid in December, meaning Barrick has given shareholders a yield of 3.16% this year.
With its world class portfolio of mines, the majority in politically stable jurisdictions such as the US, Canada, Mexico and the Dominican Republic and major new projects such as Goldrush, Pueblo Viejo, and Donlin in Alaska due to come on stream in the next few years, Barrick is well positioned to grow its output.
Mr. Bristow’s long-term relationships in politically volatile regions have resulted in good performance from mines in the DRC, Tanzania, and Papua New Guinea as well. With the added bonus of its copper exposure benefiting from the demand from electric vehicles, Barrick remains a Buy.
