The Motley Fool

What Is a Safer Turnaround Play: Goldcorp Inc. or Barrick Gold Corp.?

Goldcorp Inc. (TSX:G)(NYSE:GG) is in its fourth year of decline. From its high of $54 per share in 2011, it has gone down to its current price of under $18 per share,  a drop of more than 67%.

Barrick Gold Corp. (TSX:ABX)(NYSE:ABX) is in a similar boat and is in its fourth year of decline. From its high of $53 per share in 2011, it has gone down to $9, an 83% decline.

With an initial look, it seems Goldcorp is a more resilient investment. Still, both miners’ business performance is dependent on the prices of the precious metals they mine, so it only makes sense to consider an investment in them when they’re priced significantly below their intrinsic values. They’re both priced at cheap valuations. Which should you buy today for a turnaround?

Let’s compare them.

Which has the cheaper valuation?

The book value is the value of assets shareholders would theoretically receive if the company were liquidated.

Goldcorp’s book value is $27.50. So, at under $18 per share, it has a price-to-book ratio (P/B) of about 0.6. This is the cheapest it has been in a decade. In the last recession in 2008-09, it traded at a P/B of 1.5 and 1.9, respectively. So, it should be able to trade at a P/B of 1.0 again, implying an upside of 53% excluding dividends.

Barrick’s book value is $11.5. So, so at $9 per share, it has a P/B under 0.8. This is the cheapest it has been in the past 10 years. If it trades at a P/B of 1.0 again, that would imply a 28% upside excluding dividends.

One trend of concern for Barrick is that its book value per share has been in a decreasing trend from 2011’s $22.8 to the present $11.5, while in the same period, Goldcorp’s book value increased from $26.3 to $27.5.

Given Goldcorp’s lower valuation and book value stability, Goldcorp wins in this category.

Ability to survive: credit rating, debt levels, and interest coverage ratio

The interest coverage ratio indicates whether a company can pay off the interest on its loans in a timely manner. Generally, an interest coverage ratio below 1.5 is a warning sign that the company could default. So, the higher the ratio, the better.

Goldcorp has an S&P credit rating of BBB+, debt-to-cap of 15%, and interest coverage of -99.3. On the other hand, Barrick has an S&P credit rating of BBB-, debt-to-cap of 49%, and interest coverage of -2.8.

Goldcorp has a higher credit rating and lower debt levels, so it beats Barrick, even though Barrick’s interest coverage is less pessimistic than Goldcorp’s. Due to overall lower debt levels, I believe Goldcorp is more able to survive a prolonged low precious metal-price environment.

Profitability: operating margin, net income, earnings per share, and free cash flow

Goldcorp’s trailing 12-month (TTM) metrics are as follows: the operating margin is -71.9%, the net income is -U$2.1 billion, the earnings per share (EPS) is -U$2.63, and free cash flow (FCF) is -U$605 million.

Barrick’s TTM metrics are as follows: the operating margin is 23.4%, the net income is -U$2.9 billion, the EPS is -U$2.52, and FCF is -U$303 million.

Both companies aren’t profitable in these environments, but comparatively from 2005 to 2014, Barrick had four years of negative earnings while Goldcorp had two. So, based on history, Goldcorp should be able to come out with positive earnings sooner than Barrick given the precious metal prices start turning higher again. Unfortunately, we don’t see any signs of this yet.

In conclusion

Both companies are speculative plays because their business performance are based on commodity prices. In this environment of low precious metal prices, I think Goldcorp has a better chance to survive and serves as a safer turnaround play.

Foolish investors should only consider buying these types of stocks with the intention to hold for the next three to five years, and they should only make up a small percentage of your portfolio as a speculative play.

The cautious investor should wait till gold prices actually show signs of turning around before buying.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share. Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune. Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

Fool contributor Kay Ng has no position in any stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.