Based out of Toronto, Canada, Barrick (NYSE:ABX) is the largest gold producer in the world with almost $11 billion in sales in 2010 and almost 7.8 million ounces of production last year. Along with that, it also has the largest gold reserves in the world with over 140 million ounces of proven and probable reserves, and a substantial amount of copper reserves currently sitting at 6.5 billion pounds as of 2010. Operations are across 26 countries and on five continents, mining a variety of metals including first and foremost gold. With all the volatility of gold prices lately, the question is, should you buy?

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Supply and Demand
According to the World Gold Council, gold demand of 919.8 tons in the second quarter of 2011 showed a staggering 17% drop from the same period last year when it was 1107 tons. This was led by an astounding 82% decrease in exchange-traded fund (ETF) demand, which was offset slightly by a 6% increase in jewelry demand and a 2% increase in technology demand. To be fair, the second quarter of 2010 saw the highest demand for gold ETF's on record and it would be hard to top that. (For related reading, see Should You Follow Soros Out Of Gold?)

However it is important to note that although the demand in tonnage has been in decline, the value of gold demand overall has still increased due to the recent spike in gold prices. Overall gold demand value has increased from $42.6 billion in Q2 of 2010 to $44.5 billion in Q2 of 2011, a 4.5% gain. China and India continue to account for over half of investment and consumption demand for gold.

Another important thing to note, the previous three quarters before hand have seen increases in the value of gold, as well as the value of the demand. It is hard to assume that gold demand will continue to drop on one weak quarter especially with the ongoing fear in the marketplace.

Geopolitical issues and sovereign debt concerns are also expected to continue for the foreseeable future. With central banks adding to their reserves, and with no major seller of gold, the lack of supply is forecasted to prolong into the future with the lack of production growth.

Competitors Comparison
Now let's see how Barrick Gold stacks up against some of its competition using a few common multiples:

Company Market Capitalization P/E PEG EV/EBITDA Price/Book ROE
Barrick Gold (NYSE:ABX) $46.6B 12.4 0.44 6.78 2.50 18.01%
Gold Corp (NYSE:GG) $37.42B 18.9 1.53 13.51 1.86 9.41%
Gold Fields (NYSE:GFI) $10.71B 37.4 0.77 8.17 2.11 6.03%
Newmont Mining (NYSE:NEM) $31.8B 14.1 1.92 6.23 2.21 20.91%
Anglogold Ashanti (NYSE:AU) $15.56B 21.7 0.17 8.93 4.08 22.07%

As you can see Barrick has the lowest price/earnings ratio, one of the lowest PEG ratios (if it's below 1 it can be considered undervalued), and one of the lowest enterprise multiples, as well as the third-highest return on equity. Using these criteria we can see that Barrick is priced favorably against its competition. However, using price to book, it trades at a slight premium compared to most (although keep in mind Barrick has the most gold reserves).

Free Cash Flow
Another way to see how well Barrick is performing is by looking at its free cash flow. This is calculated by taking the operating cash flow and subtracting its capital expenditures. During the past 6 months Barrick has had negative free cash flow due to a 36% increase in its capital expenditures over the same period last year. This is partly due to lower production than anticipated in Chile and Argentina, and so the company has increased its capital expenditures as a result. Historically however, Barrick Gold has had positive free cash flow, hitting a high of about $1 billion in 2006. This increase in expenditures should increase production so it shouldn't be too worrisome. (For related reading, see How Can I Invest In Gold?)

The Bottom Line
Barrick Gold has targeted to grow to nine million ounces of gold per year within the next five years, up 15% from 2010. It is also lowering its cost per ounce to $290-$320 down from $340-$380 per ounce. It is priced favorably against the competition and increasingly has diversified into copper with the purchase of Equinox Minerals back in July. As long as gold prices hold up (and from the lack of supply coming onto the market and central banks still buying, it looks like it will for the foreseeable future), Barrick Gold is worth a look.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center