Freeport-McMoRan Inc. vs. Barrick Gold

When fear comes into the market, it is no secret that many investors turn to gold. So far, 2018 has proved no different. Although the dollar fell by about 2.5%, the price of gold rose by more than 4%. As a result, gold-dominated stocks like Barrick Gold (NYSE: ABX) are getting more and more attention. Gold was hardly the only thing Barrick had dug out; the company also participated in the production of copper and silver. Similarly, Freeport-McMoRan (NYSE: FCX) is another mining company that is exposed to many minerals, including gold and molybdenum, although it is primarily responsible for keeping green in its pocket.

Let us learn more about these companies and better understand which companies can provide investors with better buying opportunities.

Start to understand you

Calling itself “the premier listed copper trading company,” Freeport-McMoRan’s portfolio includes 11 copper and molybdenum mines in Indonesia and Grasberg, one of the world’s largest copper and gold mines in Indonesia. Barrick Gold Corporation is one of the largest gold mining companies with market capitalization and has been mining gold minerals since 1983. The company’s portfolio includes five core mines in the Americas, gold production assets in Australia and New Guinea, and three copper deposits found on three different continents.

By having a basic understanding of companies based on their portfolio, let us understand them better by comparing some of their key indicators.

Company Market Cap FY 2017 Revenue FY 2017 EPS FY 2017 Free Cash Flow
Freeport-McMoRan $25.4 billion $16.4 billion $1.25 $3.3 billion
Barrick Gold $14.5 billion $8.37 billion $1.23 $669 million

A cursory review of these two businesses may indicate that Freeport-McMoRan is a better opportunity. Freeport-McMoRan’s revenue is almost twice as much as Barrick’s in 2017, and almost five times Barrick’s cash. However, the better chance of declaring Freeport-McMoRan based on these numbers will be reduced, so let’s dig deeper before making a decision.

Digging out debt

In order to improve its financial situation, Barrick Gold has been working hard to support its balance sheet for the past few years. For example, since the beginning of 2015, the company has reduced total debt by approximately $6.7 billion and plans to reduce another $1.4 billion by the end of 2018. In order to illustrate the success of the debt relief program, Barrick’s net debt – EBITDA ratio at the end of 2017 was 0.84, which was a decrease from 1.41 at the end of 2016. Freeport-McMoRan, on the other hand, had a net debt to EBITDA ratio of 1.61 as of 2017.

In order to find further evidence of a more conservative position on Barrick’s balance sheet, we can look at two indicators: debt-to-equity ratio and debt-to-capital ratio. In doing so, we found that Barrick’s position is more stable, making it more suitable to withstand the sharp decline in the price of gold and copper. In addition, the company can reinvest its cash in various expansion projects such as Veladero’s Phase 5 leach pad expansion.

Uncertainty in Indonesia is undoubtedly a concern

The higher debt level of Freeport-McMoRan itself did not trigger the red flag; however, given the company’s primary asset, Glasberg, it became a problem. How important is the mine to Freeport-McMoRan operations? In 2017, Indonesia’s assets accounted for 1.29 billion U.S. dollars in copper sales; the company’s North American and South American copper mines’ revenues were US$4.22 billion and US$3.67 billion, respectively. But Grasberg’s importance goes beyond copper; the deposit accounts for 99% of the company’s proven and possible gold reserves.

However, for Grassberg, the performance in 2018 may not be so bright. The company’s current dispute with the Indonesian government regarding the mine indicates that the long-term stability of the company in the country is far from being determined. Management remains optimistic that the dispute will be resolved, but optimism can hardly become a guarantee.

As for Barrick Gold, it seems that there is no comparable uncertainty to transfer its business abroad.

An underground mine passage with rails and lights.

IMAGE SOURCE: GETTY IMAGES.

Barrick seems to have an advantage, but let’s see how the valuations of the two stocks overlap each other. According to Morningstar, Barrick Gold’s trading price is seven times lower than historical earnings, and it looks more cost-effective than a trade with a five-year average trailing price-earnings ratio of 11. In terms of Freeport-McMoRan, it even looks more attractive, and its return is almost 15 times. In order to provide more insights, let us consider the valuation of the two stocks in terms of operating cash flow. Barrick’s current cash flow is 6.6 times, and Freeport-McMoRan’s trading volume is 5.5 times. Although it may seem slightly more expensive, it does not seem to be a price that will favor Freeport-McMoRan.

The final winner is…

Due to the firmer financial conditions, more stable operations and reasonable prices, Barrick Gold currently appears to be a more attractive opportunity. Looking ahead, investors should pay close attention to the prices of copper and gold, as well as companies dealing with debt and the situation in Indonesia – all of these dynamics may completely change the papers of both companies.