Back in April I wrote an interesting post asking the question Are Gold Stocks Cheap? In that post I looked at the two leading gold producers, Barrick Gold (ABX), and Goldcorp Inc. (G). Both these multi-billion dollar companies trade on the TSX, but they are by production tonnes and profit, the world’s leading gold miners and gold producers. They generally have solid fundamentals, low debt, and pay a dividend. Like most mining companies the dividend yield is lower. Many low dividend yield stocks have tremendous potential for capital growth that far outweighs the yield.
ABX and G together make up nearly 5.5% of one of Canada’s most popular ETFs XIC. These two gold producers also make up Canada’s most popular ETF, XIU. Approximately 6% of XIU is composed of Barrick and Goldcorp. You can add on another 2% onto both these ETFs for the other gold producers such as Yamana Gold Inc. and Kinross etc. You may have no desire to invest in gold producers. But if you are investing in Canadian index ETFs, then by default you already are investing a large portion of your portfolio in these types of companies. So which one to choose, Barrick or Goldcorp?
Is Goldcorp the Better Choice?
Obviously if you are investing in Goldcorp or Barrick, you are not investing for the yield. Although the dividend yield for Barrick Gold is higher than Goldcorp, it has much more debt and a slightly lower profit margin (see table below). Goldcorp’s very low debt-to-equity ratio of 3.42 is much lower than Barrick Gold’s ratio of 50.51. A debt-to-equity ratio of 50 is low compared to many other big blue-chip dividend payers, however when compared to each other Goldcorp has a stronger balance sheet. However, Goldcorp cut its 2012 forecasts after recent operational and production issues. Goldcorp is a monthly dividend payer, and Barrick pays its dividend quarterly.
|Company||Ticker||Price||Market Cap||Dividend Yield||Payout Ratio||Debt-to-Equity||Profit Margin|
|Barrick Gold||ABX||34.66||34.6 B||2.33%||17.9||50.51||30.35%|
The Shakeup at Barrick
Barrick had a surprise management shake-up back in early June, ousting long time CEO Aaron Regent. This was a big surprise to institutional investors and analysts who considered Mr. Regent well respected by his peers. In addition Mr. Regent received a glowing review from his board only a few months earlier. Shareholders are still in the dark. Surprise events like these can also raise serious questions for investors.
The Price is Still Declining
Whereas gold bullion is expensive, gold producers are certainly not. As I pointed out in my previous post, Are Gold Stocks Cheap?, Barrick and Goldcorp are now trading at their three year lows, and may represent a buy opportunity in the near future. I also suggested that there may be future declines in the price of Gold Producers. This still appears to be the case. There is still a slowing demand in resources for China, the possible effects of share dilution in the minor sector, and demand for gold bullion over gold producers. With these gold producers now trading at their three year lows, I’m still waiting to see how much further the price will fall.