Gold enjoyed a positive run in 2017, surging more than 12%, its strongest gain since 2010. The performance is particularly noteworthy in a year when the U.S. Federal Reserve has been hiking rates and equity markets remained strong.
Spot gold headed for the biggest gain in three weeks after the Fed hiked interest rates by a quarter percentage point at its December policy meeting. This was because the market had already factored in the possibility of a rate hike given the upbeat economic data. Gold prices trended upward interpreting the Fed’s statement as dovish considering that it is planning only three rate hikes in 2018 and not four.
The bullish momentum for the yellow metal has continued in 2018 so far, with gold currently trending above the psychological level of $1,300 an ounce. The rally can be attributed to weaker dollar and renewed safe-haven buying prompted by heightened geopolitical tensions.
According to the World Gold Council, there are plenty of reasons to be optimistic about gold’s performance in 2018. A number of new mines entered production in fourth-quarter 2017, which might support mine production till 2018.
On the demand side, major markets, India and its neighbor China will continue to be growth drivers. Further, the United States continues to be a strong market driven by economic growth, improving employment levels and growth in consumer confidence. Demand from central banks is also expected to remain strong.
As per the Zacks Industry classification, the gold mining industry is grouped under the broader Basic Materials sector, which is among those Zacks sectors that are expected to rack up the strongest gains in the fourth quarter. Fourth-quarter earnings for the sector are projected to climb 43.5% while revenues are expected to spike 20.7%, per the latest Earnings Preview.
In this write up, we run a comparative analysis on two major gold mining stocks – Barrick Gold Corp. ABX and Newmont Mining Corp. NEM – to figure out which of these stocks is better placed ahead of their fourth-quarter earnings report.
Barrick – the biggest producer of gold on the planet – is scheduled to report its fourth-quarter numbers on Feb 14, while Newmont will post its fourth-quarter results on Feb 22. Both Barrick and Newmont carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Other major gold stocks reporting earnings this week and the next include Goldcorp Inc. GG, Kinross Gold Corp. KGC, Agnico Eagle Mines Limited AEM, Yamana Gold Inc. AUY and AngloGold Ashanti Ltd. AU.
Let's take a closer look at how Barrick and Newmont are stacked up against each other in terms of certain key metrics.
ESP and Earnings History
Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their upcoming earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with the combination of a favorable Zacks Rank #1, 2 (Buy) or 3 and a positive Earnings ESP, the chance of a positive earnings surprise is as high as 70%.
Newmont is likely to beat earnings in the quarter to be reported. This is because the stock has an Earnings ESP of +1.49% and a Zacks Rank #3. However, the picture is different for Barrick with an Earnings ESP of 0.00% and a Zacks Rank #3, a combination which makes surprise prediction difficult.
With respect to surprise, Barrick beat estimates in two of the trailing four quarters while missed twice. In this timeframe, it came up with an average negative surprise of 8.2%. On the other hand, Newmont has a fairly impressive surprise history, having beaten the Zacks Consensus Estimate in three of the last four quarters with an average beat of 17.6%.
In terms of earnings growth expectations, Newmont scores way above Barrick. The expected earnings per share growth rate for Newmont for the fourth quarter currently stands at 21.2% compared with an expected decline of 4.6% for Barrick.
Newmont clearly outpaced Barrick in terms of price performance in 2017. Newmont’s shares rallied 10.1% for the year while Barrick lost 9.4%. Newmont also outperformed the broader industry’s gain of 9.2%.
While Newmont’s stock performance is partly supported by its forecast-topping earnings performance, efforts to improve its production profile and strengthen its balance sheet, Barrick’s shares were hit by the disputes surrounding Acacia Mining (the largest gold producer in Tanzania, in which Barrick holds a 64% stake) that had sparked concerns among investors.
In the past year, the dividend yield for both Newmont and Barrick was higher than the broader industry. The industry has an average dividend yield of 8%, lower than 65.7% for Barrick and 36.2% for Newmont. Hence, on a comparable basis, Barrick shareholders earned a better dividend yield than Newmont.
The debt-to-equity ratio is a good indicator of the financial well-being of a company and is a good proxy for its debt-servicing capacity. Barrick has a debt-to-equity ratio of 55.5, while the industry has debt-to-equity ratio of 33.4. In contrast, with a debt-to-equity ratio of 33.1 Newmont wins this round.
This metric measures the ability of a company to meet its short-term debt obligations efficiently. In other words, it is the ratio of the current level of total assets and versus the current level of liabilities. Here, Newmont is a clear winner with a current ratio of 4.18, which is superior to Barrick’s reading of 2.73.
Going by the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) multiple, which is often used to value mining stocks, Barrick looks cheaper compared with Newmont.
In case of Newmont, the trailing 12-months EV/EBITDA ratio is 8.1, which is above its own average of 7.9 in the past one year and also near the high level of 8.3 it scaled over that period. Moreover, it is overvalued than the industry that has a reading of 7.5. On the other hand, Barrick is cheaper with a trailing 12-month EV/EBITDA ratio of 4.5.
Return on Equity (ROE)
ROE is a measure of a company’s efficiency in utilizing shareholder’s funds. ROE for the trailing 12-months for Barrick and Newmont is 7.7% and 6.2%, respectively. While both stocks have scored above the industry’s level of 4.7%, Barrick holds an edge here.
Newmont scores higher in terms of price performance, earnings surprise history, growth expectations, current ratio and debt-to-equity ratio. On top of that, the company has higher ESP reading vis-à-vis Barrick.
However, Barrick holds an advantage when it comes to valuation, dividend yield and ROE measures. Overall, our comparative analysis shows that Newmont has an edge over Barrick on most of the parameters.
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Newmont Mining Corporation (NEM) : Free Stock Analysis Report
Kinross Gold Corporation (KGC) : Free Stock Analysis Report
Barrick Gold Corporation (ABX) : Free Stock Analysis Report
Goldcorp Inc. (GG) : Free Stock Analysis Report
AngloGold Ashanti Limited (AU) : Free Stock Analysis Report
Agnico Eagle Mines Limited (AEM) : Free Stock Analysis Report
Yamana Gold Inc. (AUY) : Free Stock Analysis Report
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