There are some market participants who hold the view that 2023 may bring a slowdown in the global economy amounting to a recession. Accordingly, investors may be looking for assets that are not correlated to stocks, and that do protect against inflation.
The uncertainty of the future for economic growth may draw some investors to the safe haven of gold stocks. While the volatility of this sector would suggest investors should not put all of their golden eggs in this basket, a good night’s sleep could result from the allocation of a portion of a diversified portfolio to gold producing stocks, particularly those that pay a dividend.
Typically, the analysis of gold stocks focuses on resources and grades. However, producing firms can be measured according to traditional profit-oriented variables. Gold stocks that have some hallmarks of rising prices, cash flow and profit are Barrick Gold Corp. and Centerra Gold Inc.
Barrick Gold Corp. (TSX—ABX; NYSE—GOLD)
Barrick generates revenue of $11.55 billion and is a Canada-based gold and copper producer. The company is engaged in operating mines and projects in 18 countries in North and South America, Africa, Papua New Guinea and Saudi Arabia.
With return on equity of 9.27 per cent and an operating margin of 33.01per cent, Barrick has a healthy cash flow of $4.07 billion in the last 12 months, and is trading at an attractive price-to-book ratio of 1.18. Its dividend yield is about 3.43 and the dividend appears to be sustainable with a conservative payout ratio of 45.79 per cent.
At its November 2022 investor presentation, President and CEO Mark Bristow, in providing an overview of the merger between Barrick and Randgold, emphasized that “to be world class you have to be global.” He underscored the ability of Barrick to continue on its path of “creating shareholder value from gold and copper” and of generating “disciplined shareholder returns” based on an “industry-leading dividend framework that provides an opportunity for enhanced returns while delivering financial flexibility and predictability throughout the cycle”.
Together with its ongoing share buyback program, the design of this firm to fit the cyclical nature of its industry should provide shareholders with the ongoing cash flow and confidence to continue holding the shares as a safe haven during the ebb and flow of the global economy.
Centerra Gold Inc. (TSX—CG; NYSE—CGAU)
Generating revenue of $892 million, Centerra Gold is a Canada-based gold mining company. The company is focused on operating, developing, exploring and acquiring gold and copper properties in North America, Turkey, and other markets worldwide. The company operates two mines, the Mount Milligan Mine in British Columbia, Canada, and the Oksut Mine in Turkey.
Although quarterly revenue has declined about 19 per cent in the last quarter compared to the same quarter in the prior year, its return on equity is 17.51 per cent, and its profit margin is 36.70 per cent. Centerra pays a dividend yield of about 3.99 per cent and based on its very low payout ratio of 5.66 per cent it appears to be able to sustain this dividend.
On November 7, 2022, Interim President and Chief Executive Officer Paul Wright stated that Centerra has “solid operating teams managing our assets, and I’m excited for the future of the company.” While the Oksut Mine generated a free cash flow deficit as leaching operations were suspended, mining, crushing and stacking activities continue. The board was sufficiently comfortable with “the company’s strong financial position” to approve the quarterly dividend.
Moreover, Mr. Wright continued, “In consideration of Centerra’s current market valuation and to increase shareholder returns, in October the company also announced a normal course issuer bid.” This demonstrated commitment to maintaining value for shareholders should provide comfort to investors looking for a safe haven in an uncertain economic environment.
This is an edited version of an article that was originally published for subscribers in the December 2022/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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The MoneyLetter •2/5/23 •