Course 409: Hard-Asset Stocks
What Does It Cost?
In this course
1 Introduction
2 Has Barrick Capitalized on Its Natural Endowments?
3 What about Growth?
4 What Has Company Performance Meant to Shareholders?
5 Has It Delivered the Diversification Benefits of a Hard-Asset Stock?
6 What Does It Cost?
7 Conclusion: Appraising the Asset

A strong performance in the mines has driven Barrick's impressive stock-market performance, but this package is attractive only at the right price. Because cash flow is a better measure of performance than earnings, a P/E multiple isn't the best way to value a hard-asset stock. A better gauge of value is the price/cash flow ratio. Barrick trades at 13 times cash flow, well below the broad market but expensive for the metal-mining industry. Although cash-flow multiples help us get a handle on the relative value of Barrick's current operations, these ratios are silent about the value of its untapped reserves, an important component of its long-term value. To put a price on Barrick's unmined reserves, divide its market capitalization by its unmined precious-metals deposits, which you can find in the company's annual report. This ratio tells you what you're paying for each ounce of gold buried in the company's mines. Expect to pay more for those reserves if the company boasts low production costs. Each ounce of Barrick's unmined gold is priced at about $200. At Glamis Gold GLG, a relatively marginal producer, the gold reserves are valued at just $50 or so per ounce. But Glamis spends about $230, nearly 50% more than Barrick, to bring an ounce of gold to market. Barrick isn't cheap, but its low production costs seem to justify the premium.

Next: Conclusion: Appraising the Asset >>


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