Among the options available to investors looking for a hedge, gold stocks are often one of the first places they look. Gold producers vary greatly in terms of size, productivity, and profitability, making choosing the right gold company a difficult one at any point in commodity cycles.
With the price of gold rebounding meaningfully since December, investors are beginning to take deeper looks at companies such as Barrick Gold Corp. (TSX:ABX)(NYSE:ABX). Shares of companies like Barrick have seen flat or declining share price appreciation in recent years, as investors largely have shifted focus toward higher-growth options amid inflation numbers, which have not moved in any significant way, and increased mining costs, which are expected to eat into profits in the long term.
One of Barrick’s strengths is the company’s low-cost production model in which Barrick is able to leverage its size as the world’s largest producer to give investors access to gold production which will remain profitable above the US$900 level. This past week, Barrick announced its quarterly earnings and gave forward guidance on its expected production levels as well as its expected production costs. In 2017, what many have considered a banner year for the company, Barrick was able to mine gold at a cost of approximately US$750 per ounce, resulting in a profitability increase and expectations that margins should widen if gold continues to climb in a slow and steady manner as expected.
Barrick’s management team announced that its outlook for 2018 was not as rosy, with costs expected to maintain around the US$750 level or increase as high as US$875 per ounce, depending on a number of factors, including production levels. The forecast given to investors for how much gold Barrick expects to pull out of the ground came in between 4.5 million and five million ounces — a decline of between 6% and 18%.
The company’s share price dipped on the announcement, with investors considering the increasing costs of pulling gold, a non-renewable resource, out of the ground. Long-term investors have also been spooked at Barrick’s medium-term forecast in which the company expects to pull only 4.2-4.6 million ounces of gold per year out of the ground between 2019 and 2022.
Gold is a commodity that is very sensitive to commodity prices. If a bear market is around the corner, owning shares in low-cost, high-volume producers such as Barrick is a solid long-term play. That being said, rising costs of production and lower-than-expected production levels could turn out to be a problem for shareholders if miners are not able to de-leverage at a brisk enough pace.
For investors looking for a solid hedge, there are few other gold miners out there that provide the margin of safety Barrick currently offers.
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Fool contributor Chris MacDonald has no position in any stocks mentioned in this article.