Digging Into Barrick Gold: A Strong Position Among Gold Mining Stocks?

By Markets Fool.com


Image source: Getty Images.

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Blame in on Brexit. Blame it on the increasing negative interest rates offered by central banks. Better yet -- blame it on the bossa nova.It's not easy to attribute the 20% rise in gold prices over the past year to just one factor. Simpler, though, is recognizing that the market is focusing more on gold, so considering the value of gold stocks in your own portfolio is a worthwhile endeavor.

Let's begin by turning our attention to Barrick Gold (NYSE: ABX), a global leader in gold mining, to determine if its strengths pique your interestfor a precious metal stock.

Keeping costs in check

In evaluating mining companies, one of the most important figures to consider is the company's all-in sustaining costs (AISC). The mining industry's version of operating expenses, AISC accounts for multiple items, such as general and administrative costs, capital expenditures associated with mine development and production, and more.

Herein lies one of Barrick Gold's most significant competitive advantages. The company is quite proficient at keeping its AISC low. Between fiscal 2014 and 2015, the company managed to improve its AISC 3.8%. And should it achieve the midpoint of its guidance, the company will report a 5.5% improvement from 2015 to 2016. What's even more impressive is the company'sability to reign in costs at its core mines; management estimates that the AISC will total between $660 and $730 per ounce. These figures don't mean much without some context, so let's compare them against the AISC for some of Barrick Gold's leading peers. All figures are on a per ounce basis.

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Company 2015 2016 (Estimate)
Barrick Gold $831 $760 to $810
Goldcorp (NYSE: GG) $894 $850 to $925
Kinross Gold (NYSE: KGC) $975 $890 to $990
Newmont Mining Corp. (NYSE: NEM) $898 $900 to $960

Data sources: Barrick Gold corporate presentation, Goldcorp Annual Report 2015, Kinross Gold Annual Report 2015, and Newmont Mining Corp. corporate presentation.

Even if Barrick Gold reports an AISC for 2016 at the high end of its estimated range and the other three companies all report at the lowest end of their ranges, Barrick Gold would still be the leader for 2016. Maintaining a low AISC is essential, and though many companies claim it's a priority, Barrick Gold has demonstrated that actions speak louder than words.

Location, location, location

Barrick's strengths don't end at its ability to rein in costs. The company is also well-positioned in that its operations are geographically diversified. Located on five different continents, Barrick has operating mines or projects in Canada, the United States, the Dominican Republic, Peru, Chile, Argentina, Tanzania, Zambia, Australia, Papua New Guinea, and Saudi Arabia. Clearly, the company has executed a key element of its corporate strategy: investing in assets that reduce geopolitical risk.

Once the company identifies locations with acceptable levels of political risk, it is able to apply its self-proclaimed competitive advantages -- its "exploration expertise." According to the company, since 1990 it has "found 142 million ounces of gold for an overall discovery cost of$25per ounce, or roughly half the average finding cost across the industry."

How does the company demonstrate its exploration mettle in locating precious metals? With theBarrick Exploration System.

The Veladero mine in Argentina produced 602,000 ounces of gold in 2015. Image source: Barrick Gold.

Developed over the past two decades, the proprietary system is used to identify, evaluate, and rank exploration projects. According to the company, the competitive advantage of is clear: "This system significantly increases the chances for success and ensures our exploration dollars are allocated to the projects with the best potential returns at the lowest risk."

High grades

Mining gold is no small endeavor. The odds are pretty good that eager investors -- dreaming of opening their own mines -- won't be launching Kickstarter campaigns anytime soon. Few entrepreneurs, of any ilk, decide to jump into the mining game -- the barriers to entry are just too high. And that's another of Barrick Gold's competitive advantages, but it extends further than just alleviating concerns of an upstart mining company stealing market share.

Gold mines come in all shapes and sizes, and one of the most significant distinguishing factors between the mines is their quality. According to Investopedia, the advantage of a high-quality mine is clear:

Higher-quality mines have higher ore grades, and lower-quality mines have lower grades. When gold ore has a high grade, it takes relatively less effort to extract an ounce of gold from the ground; less ore has to be dug out, which reduces input costs for the gold mining company.

According to Barrick, the quality of its core mines in the Americas -- estimated to represent 70% of production for 2016 -- greatly exceeds that of its leading peers: Goldcorp, Kinross Gold, Newmont Mining, andNewcrest Mining Limited.

Image source: Barrick Gold.

Measured in grams per tonne (g/t), the grade is an essential element of evaluating a mine's worth. As of Dec. 31, 2015, Barrick Gold's average overall reserve grade of its core mines exceeded its peers by approximately 65%.

It's not as if the quality of the other mines is so poor. According to the company's 40-F, the grade of its proven gold mineral reserves totaled 1.64 g/t, and the grade of the probable mineral reserves totaled 1.23 g/t. Between the two -- proven and probable -- gold mineral reserves, the overall grade amounted to 1.32 g/t. Though the quality of Barrick Gold's probable reserves lags that of the proven reserves, they still outshine the company's peers.

The takeaway

Every company has its strengths and weaknesses, and Barrick Gold is no different. The company has developed a global presence, which features high-quality mines in safe geopolitical environments. Leading the industry in the ability to maintain and sustain its mines, Barrick Gold is well-positioned to take advantage of the increasing interest in the gold market.

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Scott Levine has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.