There are a myriad of ways investors can add exposure to gold in their portfolios. Whether it’s buying physical bouillon, investing in futures and options, or buying gold miners and other gold-related stocks directly, the options really are quite extensive.
For investors looking at the gold mining sector, I do think Barrick Gold (TSX: ABX) and Franco-Nevada (TSX: FNV) are two great options worth considering. These are companies with very different business models, but each provide the kind of outsized gold exposure those truly bullish on precious metals may be looking for right now.
Let’s dive into what to make of these two gold names, and whether now’s the time to add some exposure to one or both of these stocks.
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Barrick Gold
Let’s start with Barrick Gold, one of the top global gold miners in this space. The Canada-based company continues to be one of my top picks as a way to play the scale and operating efficiency most investors are looking for from a gold miner. The company’s strong revenue growth (18% year-over-year this past quarter) is evidence of just how powerful rising gold prices can be for miners. As the price of gold increases, Barrick is typically able to provide investors with a much higher return on capital, given that the company’s expenditures and debt are mostly fixed.
Operating cash flow and adjusted EPS growth of Barrick have been equally impressive, coming in at 59% and 26%, respectively, over the past year as of Q1. With gold production rising, Barrick does appear to be one of the best options for those looking for exposure to this space right now.
Franco-Nevada
A top royalty and streaming company in the precious metals mining space, Franco-Nevada earns a percentage of revenue from the various operators the company lends to. In other words, this company acts as a diversified player in the lending side of the spectrum, providing high-margin exposure to a sector that has been hampered on the margin front during previous periods when gold prices were on the decline.
Franco-Nevada’s business model is therefore less risky than investing in a mining concern like Barrick directly. However, the company’s growth of late hasn’t kept pace with Barrick’s, with Franco-Nevada delivering adjusted EPS growth of just 13.5% and net earnings growth of roughly 26% year-over-year.
Now, this growth does come alongside a beefy gross margin of 87%, which is really what most investors are after, and what drives this company’s high multiple (for the sector).
So, which is the better pick?
In my view, Franco-Nevada’s underlying business model is one I think is intriguing at present. With gold prices where they are (and the risk of default for most mining operators near historic lows), this is a company that could continue to see strong growth over the long term. But that’s the key risk with owning a streaming and royalty firm like Franco-Nevada – when hard times hit, such a company could get hit harder than the overall sector.
For gold bugs who intend to invest in this space for the long term, owning both would be my preferred way to go. Alternatively, there are a number of ETFs out there tracking this space, which may be worth considering.
But I do think that having exposure to both the mining and financing side of this sector makes sense for those who may already have bouillon exposure, and/or precious metals exposure from other assets in this space.
