3 Reasons to Avoid Barrick Gold

Its shares may look cheap, but this is still a bet not worth making.

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

It’s no secret that Barrick Gold (TSX: ABX)(NYSE: ABX) has had a rough few years. The shares, which were trading above $50 back in late 2011, have plunged since then due to operational mishaps, a falling gold price, and some big asset writedowns. On Tuesday, the stock price closed at $17.44.

So at this point, it can be tempting to buy some shares of the company in an attempt to score a bargain. After all, we should always try to be greedy when others are fearful. But there are reasons why Barrick’s shares are still too expensive, and three of them are listed below.

1. Transparency

When analyzing a gold company, there’s one question in particular that’s very important to figure out: Just how much does it cost the company to get an ounce of gold out of the ground? Barrick makes that question very hard to answer.

The company reports a bunch of different metrics. Just last year, its “adjusted operating costs per ounce” were $566, but its “all-in sustaining cash costs per ounce” were $915 and its “all-in costs” were $1,282. This last number is of course particularly worrying because it is higher than the current gold price.

It would be preferable for the company to report two simple measures: first, the cost to find an ounce of gold, and second, the cost to actually mine it, process it, and transport it to market. Because Barrick obscures the picture, it looks very suspicious.

2. A lack of cash flow

Last year, Barrick made negative $1.3 billion in free cash flow in a year when the gold price averaged over $1,400. Even if one excludes the $2 billion spent (wasted) on the suspended Pascua Lama project, the company still brought in only $700 million. Remember, this is a company valued by the market at over $20 billion.

There are plenty of other companies that don’t make a lot of cash because they’re investing heavily in pursuit of growth. But Barrick’s reserves actually shrunk last year, making it look like the company cannot make money with gold prices where they are.

3. Better alternatives

Not too long ago, investors would buy mining companies like Barrick to bet on the price of gold. Now the best way to make that bet is with an exchange-traded fund, such as the iShares Gold Bullion ETF (TSX: CGL). ETFs like these have numerous advantages over the miners, such as greater simplicity, no risk of operational mishaps, and low cost. There’s also no need to worry about failed projects or corporate governance issues, something Barrick’s investors can really appreciate.

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.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

More on Investing

Simple life style relaxation with Asian working business woman healthy lifestyle take it easy resting in comfort hotel or home living room having free time with peace of mind and self health balance
Stocks for Beginners

New Investors: Follow the KISS Model With These 3 TSX Stocks

These TSX stocks keep it super simple for new investors. You'll need each of these services over the next decade…

Read more »

stock research, analyze data
Dividend Stocks

RRSP Investors: 1 Cheap TSX Dividend Stock to Buy Now and Own for 35 Years

RRSP investors can still find top TSX dividend stocks to buy at discounted prices.

Read more »

A airplane sits on a runway.

Why Did Bombardier (TSX:BBD.B) Stock Surge Over 75% in a Month?

Bombardier (TSX:BBD.B) stock has surged over 75% in last 30 days after strong second-quarter earnings. Is it a buy at…

Read more »

financial freedom sign
Stocks for Beginners

Millennials: Pay Down Debt and Get Rich in Just 1 Decade

Millennials continue to have huge debt on their hands, but they can pay it off and become rich by getting…

Read more »

Cogs turning against each other
Dividend Stocks

2 of the Safest Stocks (With Dividends) to Buy in Canada Now

Here are two of the safest stocks investors in Canada can buy now.

Read more »

Money growing in soil , Business success concept.
Tech Stocks

Got $1,000? Buy These 3 Top Growth Stocks

These three Canadian growth stocks could deliver superior returns over the long run.

Read more »

edit Businessman using calculator next to laptop
Dividend Stocks

2 Top Canadian Value Stocks Worth Buying Right Now

Here's why Alimentation Couche-Tard (TSX:ATD) and Toronto-Dominion Bank (TSX:TD)(NYSE:TD) are two top value stocks to consider right now.

Read more »

A worker wears a hard hat outside a mining operation.
Metals and Mining Stocks

Ivanhoe (TSX:IVN) Had a Record Quarter: Should You Buy the Stock Today?

Ivanhoe Mines Ltd. (TSX:IVN) delivered record profits in its Q2 2022 earnings, which should spur investors to look hard at…

Read more »