Warren Buffett has never been the biggest fan of gold. Having stressed its “lack of utility” in many public statements, he has mostly avoided investing in it. Buffett generally prefers investing in more productive assets and considers gold to be a “bet on fear.”
Recently, however, the Oracle of Omaha seems to have changed course. In the second quarter, he made a major bet on a gold company that has been making big gains in 2020. Worth $563 million at the time, the position was one of the bigger bets he made this year. After selling airlines and trimming his position in banks, Buffett has once again surprised the markets. As you’re about to see, his latest investment is not only a big bet on gold … but also on Canada!
So, what is this investment Buffett made, and why was it so consequential?
Barrick Gold (TSX:ABX)(NYSE:GOLD) is a Canadian gold and copper mining company based in Toronto. It has operations in North and South America, Africa, and the Middle East. In 2019, Barrick mined 5.5 million ounces of gold, making it one of the most productive gold miners in the world.
Over the years, Barrick Gold has given investors a wild ride. The company’s stock performed pretty well during the 2000s but declined precipitously in 2011, when the price of gold began to tank. Many gold stocks were impacted at the same time, but Barrick was dealing with high debt levels as well as weakness in gold simultaneously. As a result, its stock price fell over 80% in a few short years.
Since then, Barrick Gold has been on the upswing. Currently up 312% from the bottom in 2015, the stock has rallied impressively. A big part of the rally is no doubt the resurgence of gold itself. But that’s not the whole story. In addition to mining larger quantities of an increasingly valuable commodity, Barrick is also paying down its debt. In the second quarter, the company reduced its net debt by 25% and announced that it had no upcoming maturities until 2033. This leaves the company well positioned to survive a temporary downturn in the price of gold. That may be part of why Buffett likes it.
Why Buffett may have bought ABX
So far, Buffett has not elaborated on why he bought Barrick Gold shares. News broke when Berkshire Hathaway released its 13-F filing, which Buffett hasn’t commented on in detail. So, we won’t know for sure why Buffett bought ABX until he makes another public statement.
However, it’s possible to speculate. By looking at reasons why Buffett invests in other companies, we might be able to gauge what he was thinking when he bought ABX.
One possible reason has to do with Barrick’s fundamentals. Buffett is a value investor at heart, and he makes most of his decisions based on fundamentals. Barrick has solid fundamentals pretty much across the board. In its most recent 12-month period, ABX had a 39% profit margin, a 22% return on equity, and a 9% dividend payout ratio. In its most recent quarter, it posted 48% sales growth and 84% (adjusted) earnings growth. Despite that, its stock remained fairly inexpensive. So, it looks like Barrick Gold is both profitable and a good value.
Another possible reason could pertain to investor psychology. Buffett has gone on the record as calling gold a “bet on fear,” and we are certainly living in fearful times. From COVID-19 to the financial crisis, we’ve been living through unprecedented turbulence. This is exactly the kind of atmosphere that gold tends to thrive in. And that’s exactly what we’ve been seeing. It’s a good time for gold, and an even better time for Canada’s biggest gold producer.
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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 Andrew Button has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: short September 2020 $200 calls on Berkshire Hathaway (B shares), long January 2021 $200 calls on Berkshire Hathaway (B shares), and short January 2021 $200 puts on Berkshire Hathaway (B shares).