Barrick, Goldcorp, or Newmont – Who’s the Cheapest?

Gold companies look cheap. Or do they?

| More on:
The Motley Fool

I don’t know about you, but I can’t get gold stocks out of my head these days.  Even though the commodity has been relatively stable, gold mining stocks just keep going lower.  This week, it was a Goldman Sachs “short” recommendation for the commodity that sent the space reeling.  Who knows what dire news next week may bring.

This is why investing is hard!

If one compares the multiples at which the company’s in the gold space currently trade to historical levels, this appears to be the opportunity of a lifetime.  The table below compares the current price/book multiples for Barrick (TSX:ABX,NYSE:ABX), Newmont (NYSE:NEM) and Goldcorp (TSX:G,NYSE:GG) to their 10-year averages.  The difference is astonishing and enough to make any value oriented investor sit up and take note.

Company

Current P/B

10 Yr Avg P/B

Barrick Gold

1.1

2.5

Newmont

1.4

2.4

Goldcorp

1.1

2.6

Source:  Capital IQ

The stocks appear cheap.  Real cheap!  But, they’ve appeared cheap for some time based on multiple analysis.

To get a better feel for what these three companies are worth we’re going to take an alternate approach.  Warning….math ahead.

What’s priced in?

We know the current book value for each and we also know what the market is expecting for 2013 earnings.  The table below combines these inputs and conveys an expected return on equity (ROE) for each (earnings/book value = ROE).  We can then compare this expected number to the average ROE that each company has achieved over the past 10 years.  This allows us to gauge the market’s expectations.

Company

Expected ROE

10 Yr. Avg ROE

Barrick Gold

17%

9.5%

Newmont

13%

10.5%

Goldcorp

7%

9.4%

Source:  Capital IQ

Even though the multiples have washed out, market expectations for two of the three haven’t.  For instance, the market is pricing Barrick as though it’s going to achieve an ROE of 17% this year.  This is far above the 10 year average of 9.5%.  And, I dropped the company’s 2009 ROE of -28% from the calculation.  If included, the average is 5.8%.

Stay with me

Last table.  Conveyed below are some rough earnings estimates based on current book values and the average ROEs from above (book value*ROE = earnings).  Assuming multiple expansion does not occur, the current trailing P/E multiple has been applied to each estimate to arrive at a value.

Company

Est. EPS

LTM P/E

Value

Current Price

Barrick Gold

$2.07

9.6

$19.90

$24.95

Newmont

$2.91

10.3

$29.99

$38.74

Goldcorp

$2.63

16.2

$42.62

$31.57

Source:  Capital IQ

Based on this analysis, only Goldcorp should be considered “cheap”.

The Foolish Bottom Line

These are back-of-the-envelope type calculations but serve as a quick and relatively easy way to assess what’s priced in and what each company may be worth.  With this bit of knowledge in hand, I’m at least going to sleep a little better knowing I shouldn’t be re-mortgaging the house to buy Barrick or Newmont!  Goldcorp though – hmmmmm…….

The S&P/TSX Composite Index is loaded with resource and financial stocks.  Because of this, investors that rely on Canadian Index funds or ETFs severely lack diversification in their portfolio, opening them to undue risks.  We have created a special report that outlines an easy to implement strategy and 5 Canadian stocks that reduce the risks involved with passively investing in the Canadian market.  Click here now to receive “Buy These 5 Companies Instead of Following a Flawed Piece of Advice” – FREE!

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Iain Butler is short $32 July 2013 put options on Goldcorp and owns shares outright in Barrick Gold.  The Motley Fool has no positions in the stocks mentioned above.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

A cannabis plant grows.
Cannabis Stocks

Canopy Growth Stock Is Rising But I’m Worried About This One Thing

Canopy Growth stock is soaring as the legalization effort makes real progress in both Germany and the United States.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Investing

3 Roaring Stocks to Hold for the Next 20 Years

These top TSX stocks are excellent long-term buys, given their multi-year growth potential and solid underlying businesses.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »

Businessman holding AI cloud
Tech Stocks

Could Investing $20,000 in Nvidia Make You a Millionaire?

Nvidia stock has made investors millionaires in the last 10 years. Is it too late to invest to become a…

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

money cash dividends
Stocks for Beginners

Have $500? 3 Absurdly Cheap Stocks Long-Term Investors Should Buy Right Now

If you're looking for cheap stocks, these three have a huge future ahead of them, all while costing far less…

Read more »