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Is Barrick Gold the Best Value in Mining Socks?

There is only one gold-mining stock out there that I consider a potential value investment these days. It is Barrick Gold (NYSE: ABX), a Canadian company that might qualify as a value investment because it is cheap and makes money.

What is more interesting is that Barrick’s revenues are growing again, after several years despite falling gold prices. The revenue grew slightly in first quarter 2017, rising from $8.558 billion in December 2016 to $8.621 billion in March 2017.

Despite that Barrick Gold is far from out of the woods yet. Its revenues fell by $550 million during 2016. At the end of 2015, Barrick reported $9.029 billion in revenues that dropped to $8.621 billion a year later.

Diesel Fuel is be the Key to Lower Gold Prices and Higher ABX Profits

It is not clear why revenues are growing, or if the growth is permanent, but it’s interesting. One reason why revenues are higher might be the drop in oil prices.

In this Jan. 29, 2014 photo, a drill finishes up the blast pattern, while contractors fill the holes with Anfo at Barrick Gold Corp.’s Cortez Hills, Nev., open pit. At Cortez Hills, the crews “shoot” or blast 40-foot benches and mine 40-foot benches, blast technician Travis Cummins said. The benches at the mines look like steps for giants once they are dug up. Cortez crews will shoot a ramp at 15 to 40 feet. (AP Photo/Elko Daily Free Press, Ross Andreson).

Oil prices are low right now because countries like the U.S. are exporting record amounts of petroleum. The price of a barrel of oil fell to $45 on May 4, 2017; and rose back to $47 on May 10, 2017.

Less-expensive oil means cheaper diesel fuel which means lower operating costs at miners like Barrick. That’s because almost modern gold mines are open-pit operations where most of the work is done by diesel-burning machines such as bulldozers, front-end loaders, power shovels and dump trucks.

That enables Barrick to dig more gold for less money and increase the volume of production. This can partially offset the falling cost of gold. It might also make a good company more profitable.

Is Barrick Gold Making Money?

Lower expenses are all fine and good but value investors need to ask Ben Graham’s all important question: is Barrick Gold making money?

The answer is yes for the second quarter in four years. Barrick reported a net income of $1.417 billion on March 31, 2017. That’s tremendous because as recently as September 2016, Barrick reported a net income of -$2.39 billion. This means the companies’ net income grew by $3.537 billion in six months which is tremendous.

Among other things, that indicates the 32.66% quarterly profit margin ycharts attributed to ABX is for real. It also hints of a company that has a lot of float which would be a true value investment.

How Much Money is Barrick Gold Making?

The best indicator of float is a company’s cash and Barrick is doing okay there.

It reported a free cash flow of $161 million on March 31, 2017. That was down significantly from $674 million in September 2016 and $385 million in March. This number shows us that the falling price of gold might be eroding Barrick’s cash flow.

Another first quarter number shows us that Barrick is holding its own; the cash from operations was $2.684 billion up slightly from $2.64 billion in December and $2.627 billion in September. This is good because it shows us that Barrick’s float is slowly growing despite falling gold prices.

There’s another really good number at Barrick and that’s cash and short-term investments. The company had $2.277 billion in the bank on March 31, 2017, that number was down from $2.389 billion at the end of 2016, and $2.648 billion in September. This indicates a cash rich company which I really like.

It’s also very high for a company with assets of $26.41 billion, a market capitalization of $18.69 billion and an enterprise value of $26.80 billion. That indicates a lot of value, but is Barrick Gold a value investment?

Is Barrick Gold a Value Investment?

There are definitely a lot of value characteristics here. For example; Barrick is cheap (trading at $16.38 a share on May 10, 2017), but it has a lot of cash and makes money.

Beyond that Barrick is in an unfashionable business; mining – that is not very sexy in today’s technology-driven nerd culture. The smart money these days seems to be going into cryptocurrencies such as bitcoin and ethereum. Investment capital has been pouring into those digital constructs for some time.

A bitcoin was trading for $1,795 on May 10, 2017, an increase of $1,275.95 a year earlier. A unit of ethereum or ether was trading at $89.43 a same day, an increase of $77.03 a year earlier.

Skeptics; or luddites, will say that bitcoin and ethereum are newfangled derivatives that are unproven. Gold is a proven commodity that has been around as long as civilization.

There is a possibility that cryptocurrencies will crash at some point and drive the money back into gold. There are digital marketing channels for gold that might increase the demand for the metal in the future.

Will Digital Cash and India Boost Gold Prices to New Heights?

It is now possible to invest in gold through Paytm; the most popular digital wallet in gold-crazy India, for example. Paytm has 200 million users and Indians are the world’s largest gold buyers holding 24,000 tons of the shiny stuff that is worth an estimated $900 billion.

Payment apps like Paytm and digital cash like bitcoin might increase the buying of average people in countries like India. This may expand the gold market, because many of those people will use digital cash to buy gold or gold jewelry.

Another opportunity is India’s growing middle class which historically gives gold jewelry as presents at weddings. Since might be as many as 600 million members of India’s middle class right now that’s a potentially huge market. This means there is a huge market for Barrick’s product that is growing fast.

If you must invest in a gold company buy Barrick, it is cheap and fairly safe. You may not make a lot of money; ABX is scheduled is to pay a dividend of 3¢ on May 30, 2017, but at least your investment will grow. Barrick Gold shareholders with a return on equity of 18.38% which is more than you can say for most gold miners.