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

growing plant shoots on stacked coins
Investing

Got $5,000? 3 Stocks to Hold for the Next 20 Years

Given their high-growth potential and solid growth initiatives, these three stocks are excellent additions to your long-term portfolio.

Read more »

money cash dividends
Investing

TFSA Passive Income: Make $455/Month Tax Free for Life

Canadian investors can churn out big passive income in their TFSA with stocks like Freehold Royalties Ltd. (TSX:FRU) and others…

Read more »

Natural gas
Energy Stocks

Canadian Natural Resources Stock (TSX:CNQ): Profiting From Natural Gas Strength

Soaring cash flows and dividends have come to characterize Canadian Natural Resources stock as well as other natural gas stocks.

Read more »

Question marks in a pile
Investing

Uranium Stocks: Ready for a Breakout?

Uranium mining stocks like Cameco Corporation (TSX:CCO)(NYSE:CCJ) could be ready for a breakout.

Read more »

grow dividends
Dividend Stocks

1 Cheap Stock to Turn a $20,000 TFSA Into $267,000

If you're looking to boost your TFSA, you need a cheap stock that you can hold for decades. And I…

Read more »

Profit dial turned up to maximum
Investing

This Little-Known TSX Stock Has Huge Potential

From new technologies to unglamorous but promising service businesses, there are plenty of potentially explosive, little-known stocks trading on Canadian…

Read more »

Canadian Dollars
Stocks for Beginners

How a $10,000 TFSA or RRSP Investment Can Become $193,000

Are you looking to build wealth for retirement? Here's one way that turned a $10,000 TFSA or RRSP investment into…

Read more »

edit Person using calculator next to charts and graphs
Dividend Stocks

2 of the Best Monthly Passive-Income Stocks to Buy in Canada Right Now

Here are two of the best Canadian monthly passive income stocks you can consider buying right now to hold for…

Read more »