Good as Gold, With Copper Topper

05/24/2011 1:10 pm EST


Glenn Rogers

Contributing Editor, Internet Wealth Builder and The Income Investor

Barrick Gold’s aggressive expansion into copper mining will help it to cash in on the long-lasting bull market in metals, writes Glenn Rogers in the Internet Wealth Builder.

I believe the recent pullback in commodities is a buying opportunity, particularly if you missed the big run-up we've had this past year.

Therefore, I’m recommending Barrick Gold (ABX), a company that has had some recent changes that I think make it a compelling buy at these prices.

Barrick and its chairman, Peter Munk, are well known to most Canadian investors. Munk has been a legend in the gold industry—and even now, in his early 80s, he is still a force to be reckoned with. He built Barrick into the world's largest gold producer with more than 25 operating mines, augmented by a number of land positions and exploration projects that will guarantee future supplies.

Historically, the company has been very conservatively run, with a "solid gold" balance sheet, good cash reserves, and intelligent hedging operations. It also has large deposits of silver mixed into its portfolio, and some significant copper production as well, projected to be approximately 300 million pounds in 2011.

But that amount of copper production did not satisfy Barrick's new CEO. Aaron Regent, who is considered to be a rising star in the mining industry, was brought on board in January 2009 to provide a smooth transition from Peter Munk's day-to-day leadership.

Regent was previously CEO of Falconbridge Limited, which was taken over by Swiss mining giant Xstrata (London: XTA) in 2006. That job at Falconbridge, along with other senior positions at Noranda (NOR) and Brookfield Asset Management (BAM), certainly qualifies Regent to be a successor at Barrick. Additionally, he has a strong financial background, having started out his career as a CPA.

Barrick recently announced a major acquisition, purchasing Equinox Minerals (Toronto: EQN) at a price of C$8.15 per share, for a total equity value of approximately C$7.3 billion. Equinox's primary asset is a large copper mine in Zambia. They also have a significant copper-gold project under construction in Saudi Arabia.

The company had planned, and presumably still does, to produce 320 million pounds of copper metal concentrates in 2011. The company's operating cost to produce that copper is $1.45 per pound, which is well below the current price for copper (around $4 per pound).

Both companies are based in Toronto, so the integration of Equinox into Barrick should not be too daunting.

Recently, both companies announced very good first-quarter results. Equinox generated an operating profit of $97.7 million, which was an increase of 19% compared to the corresponding period in 2010. Barrick's first-quarter profits also beat estimates, with net income rising 22% to $1 billion ($1 a share), up from $820 million (82 cents a share) a year earlier. (Note that both companies report in US dollars.)

The Street did not like this deal initially, and Barrick shares sold off 9.8% in the two days after it was announced. The stock is trading 18% below its 52-week high of $55.99. This brings the company in at a trailing price/earnings ratio of 13.2 and a forward P/E of 9.6.

The stock pays an annualized dividend of 48 cents a share to yield just over 1%. The next dividend is payable on June 15 to shareholders of record at the close of business on May 31.

I think there are three catalysts that will propel Barrick higher:

  • First, we've had a sizable correction in the commodities market, which provides a good reason to reconsider your positions in the precious metals sector.
  • Second, there is a new, well-qualified CEO at the helm, who is demonstrating that he wishes to aggressively expand the size of the company.
  • Third, the acquisition of Equinox Minerals broadens the company's portfolio and increases its exposure to copper, which should continue to face supply shortages and high demand over the next several years.

The new profile of the company gives investors deep exposure to gold, some exposure to silver, and now a much greater exposure to copper. This gives it a premier place in what I continue to believe will be a long-term secular bull market for commodities.

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