With Gold falling out of favor with the rest of the precious metals as the US Dollar breaks out of consolidation to the upside, I thought now would be a good time to take a look at one miner in particular to put on the radar for a long position in the near future.
Barrick Gold ($ABX) engages in the production and sale of gold and copper, as well as related activities such as exploration and mine development.
With a decent run since March and a pullback likely coming I’ll be watching for signs the correction is complete around the $13-$11 range to enter a long position.
So why take a look at the miners with Gold prices under pressure lately? Lets take a look at the valuations of a handful of major miners. The chart below plots the median enterprise value-to-revenues for major miners over the past 20 years. Notice that from a valuation standpoint they are cheaper today than it was in the early 2000’s when Gold was hitting $1,000 spot price.
It also looks as if the profitability of these companies is significantly better today than it was roughly 15 years ago when Gold prices were much higher.
Furthermore, the median 3-year revenue growth for this group has just turned positive again as it did at the start of the last major bull market for gold and the miners.
All in all, it looks as if Mr. Market is currently pricing in a much more dire situation than the companies actually face at present. In other words, this is what a margin of safety looks like. A normalization of the valuations for this group would yield a 50% gain for the stocks even without any upside in the gold price.