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Investors don't give Barrick the respect it deserves

Peter Munk, chairman of Barrick Gold Corp, the world's largest gold producer, speaks during the annual general meeting of shareholders in Toronto April 28, 2010.


Gold prices continue to draw strength from Europe's sovereign debt crisis, but the established companies that actually produce the largest amounts of bullion are struggling to get investors' respect.

On Thursday, Barrick Gold Corp. , the world's biggest player, is expected to announce record income for the fourth quarter. Analysts forecast that revenue will soar 28 per cent, to $3.77-billion (U.S.), and profit will shoot up 22 per cent, to $1.1-billion. Gold itself is trading above $1,700 an ounce, with Société Générale SA predicting that the precious metal will challenge $2,200 an ounce by the end of this year.

None of that, however, is impressing the Street. Investors continue to value Barrick at a price-to-earnings multiple far less than telecom companies and only a hair above most major U.S. banks.

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A big part of Barrick's market problem is that investors are turning to exchange-traded funds backed by physical gold to avoid the many risks associated with mining companies. Those challenges include getting multi-billion dollar mines up and running, stick handling complicated government regulations and absorbing unexpected tax royalties and surcharges.

But while Barrick's stock has lagged precious metal prices, the Toronto-based company's financial performance has actually outpaced them in some areas. Since 2004, its earnings per share have surged 900 per cent and cash flow per share has soared 500 per cent.

Barrick's chief financial officer, Jamie Sokalsky, argues that this level of performance should convince investors that they get more leverage to gold by owning shares of his company than they do holding gold ETFs or bars of bullion. To drive the point home, Barrick and some other major gold producers have begun making quarterly dividend payments in an effort to attract investors.

"Our goal going forward is to continue to pay a progressive and sustainable dividend. We feel that we have the operations, the cash flow generation, the balance sheet to do that," Mr. Sokalsky told investors at a conference in Whistler, B.C. last month.

Unfortunately, in his outlook Mr. Sokalsky also reminded investors of the risk connected with production. He said that while the company has met its 2011 guidance of producing between 7 million and 7.6 million ounces of gold, output for 2012 will be "slightly lower" and costs will be about 15 per cent higher.

That prompted at least two analysts to remove their buy ratings on the shares. Canaccord Genuity Corp.'s Steven Butler cited, among other things, "limited growth potential relative to its peers," as he reduced his price target to $57.50. (The shares closed Friday at $48.25.)

Stephen Walker, of RBC Dominion Securities Inc., noted the potential for "negative surprises" as Barrick brings three major new projects on line in the next couple of years. But he also commented in his report that the company will likely generate significantly greater free cash flow over the next five years, which will allow it to pay down debt, keep hiking the dividend and make acquisitions.

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The latest news on Barrick's new mining sites is encouraging. The company said last week that it expects to start gold, silver and copper production in July at its Pueblo Viejo mine in the Dominican Republic.

Pueblo Viejo, which is costing as much as $3.8-billion to construct, and Pascua-Lama – on the border of Chile and Argentina and costing as much as $5-billion – will play key roles in boosting overall gold production to 9 million ounces within the next five years and silver production to 50 million ounces.

Barrick has a reputation for knowing how to get big mines up and running, while controlling expenses by hedging both oil and currency costs. This past July, it diversified with its controversial $7.3-billion purchase of copper producer Equinox Minerals Ltd., which doubled Barrick's copper content.

The timing was bad, occuring just before a global correction in commodity prices sent copper prices plunging 30 per cent. But Mr. Walker says the assets should boost overall revenue by as much as 15 per cent and generate substantial cash flow.

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