For the first time since 2004, shares of one of the world's largest gold and copper mining companies were recently selling below $20.
But since the end of April, the stock has appeared to carve out a bottom and is in an uptrend, shooting up 7% in the past week alone.
Looking at the technical picture, the situation appears ripe for a sustained turnaround. I think this stock still has an upside potential of more than 100% from today's prices. Since 2012, the company has increased its dividend 33% to a yield of 4%, helping tide over investors while they wait.
I'm talking about Barrick Gold Corp. (NYSE: ABX).
But first, let's take a look at the reasons behind the recent price drop.
To begin with, the price of gold has taken a nosedive since November:
A mining company like Barrick makes its money from the spread between the price of gold and the cost of production. Barrick's first-quarter production costs stood at $561 per ounce, and the company estimates its costs will average $635 an ounce for 2013.
Obviously, if gold prices continue to decline, this would have a serious effect on Barrick's profit margins. As StreetAuthority analyst David Sterman recently noted, a $50 difference in the price of gold in either direction affects Barrick's revenues by an estimated $350 million.
However, two of the company's newest projects are expected to produce gold for much less.
The company's Pueblo Viejo mine, located in the Dominican Republic, began production last year and is expected to operate at $325 an ounce.
The Pascua-Lama mine, on the border of Chile and Argentina, is expected to become operational in 2014 and produce an average of 825,000 ounces in the first five years with even lower operating costs than Pueblo Viejo's.
The Pascua-Lama mine has been plagued by cost overruns -- an estimated $8 billion will have been spent by the time the mine begins production -- and delays stemming from environmental concerns on the Chilean side of the border. While Jamie Sokalsky, Barrick's president and CEO, acknowledged these concerns in a recent shareholder report, the company still maintains its goal of beginning production at Pascua-Lama in 2014.
But while the two aforementioned mines and the current problems in Chile get all the press, here's what many analysts and investors seem to keep overlooking:
Barrick's established operations extend far beyond these two projects. This is a $21 billion market cap company we're talking about. It's been publicly traded since 1985 and part of the reason for its longevity in a difficult and risky business is that it does not keep all of its eggs in one basket.
The company owns a diversified portfolio of mines all over the world. In 2012, 47% of Barrick's production came from North America, 25% from Australia Pacific, 22% from South America and 6% from Africa. This portfolio led to the production of 7.4 million ounces of gold in 2012.
The company's established assets continue to be highly profitable.
In 2012, Barrick generated net earnings of $3.8 billion and set a company record with operating cash flow of $5.4 billion.
While the company's free cash flow (which takes into account capital expenditures such as buildings and equipment) was in the red to the tune of almost $1 billion in 2012, many analysts think the free cash flow situation is about to change dramatically. And when it does, share prices should soar.
In March, Sterman gave his outlook.
"[Barrick's] free cash flow is expected to exceed $2.5 billion by next year, and $5 billion by 2015, according to Merrill Lynch's analysts. Citigroup, Credit Suisse and UBS also have price targets in the low- to mid-$40s, and their analysts also cite the looming surge in free cash flow as a key reason for their bullishness."
Smart investors are already beginning to realize the enormous upside that Barrick presents at today's prices. Since touching bottom at the end of April, the stock's momentum has shifted.
This uptrend, combined with soaring free cash flow estimates, a 4% dividend and historically low prices, make Barrick a great buy for investors seeking both growth and income.
Risks to Consider: A long-term slump in gold prices could continue to hurt Barrick's profit margins. Political unrest, which has been an ongoing problem at the Pascua-Lama mine, is always a potential roadblock for this type of company.
Action to Take --> Consider buying Barrick at up to $25 per share with a target price of $44 in the next 12 to 18 months.