Tuesday, April 30, 2013

Recent Buy: Teck Resources and Barrick Goldopen

In a previous post on The Dividend Pig, I discussed opportunity in the Canadian mining sector.  As I discussed in that post, many investors overlook mining stocks as dividend growth companies, because of their lower dividend yields. Yet these are “dividend growth” companies many with strong balance sheets. They have recently raised their dividends, and have more potential for share price increase. Take Potash Corp. (POT) as an example which recently raised its dividend by a whopping 33%! In that post I specifically discussed Barrick Gold (ABX), Goldcorp (G), Potash Corp. (POT), and Teck Resources (TCK.B).  As mentioned, Teck and Potash were at the top of my shopping list.

The Gold Selloff, Market Corrections, and Panic Selling

Figure 1. One Year Chart of Gold Bullion (April 15th panic selling).
Figure 1. One Year Chart of Gold Bullion (April 15th panic selling).

On Monday morning April 15th, I noticed the TSX Composite Index was down some -321 points (- 2.7%).  Of course markets have had a good run-up since June 2012. Both the DOW and TSX advanced to their five year highs, breaking their highs before the 2008 to 2009 Financial Crisis. Both markets were due for a correction at some point. On top of that, Gold had also been hitting its highs, just shy of $1,800 USD per troy ounce. Many gold-bugs wondered whether gold would even be able to reach the 2K mark before a major pullback.

The trigger was this Monday, April 15th, with the massive selloff of Gold Bullion. A troy ounce of gold closed on Monday at $1,361 USD, off -24% from its October 2012 highs (figure 1). This pulled down the gold producers significantly, with Barrick Gold (ABX) down -11.5% for the day, Goldcorp down -5.6% and Kinross Gold (K) down over -13.5% from its previous close. The panic selling also spread to the mining stocks with Teck Resources also down over -11.5% in the morning, closing down -7% for the day to $26.15 per share.  The entire Materials sector of the TSX Composite was down -9.78%.

I was excited to see this panic selloff on Monday morning, and felt this was a great opportunity to add positions into the materials sector. My friend Dividend Mantra also saw opportunity this past Monday in the materials sector, and pulled the trigger on shares of Australian mining giant BHP Billiton. This is a sector I have been waiting to add to my portfolio for some time now, so I already had a list of stocks ready to go. I was able to scrape together 3.5K, enough to make a purchase in two companies. I purchased shares in Teck Resources (TCK.B) and Barrick Gold (ABX). Both these companies are also interlisted on the NYSE.

Teck Resources (TCK.B)

Teck resources (TCK) is Canada’s largest diversified resources company, with a market cap over 18.4 billion dollars. It is focused on the extraction and refinement of copper, steelmaking coal, and zinc. To a large degree Teck is influenced by China and the global economy, since much of its exports and sales are from steelmaking coal. A slowing global demand for steel, especially from China, has resulted in the lower share price for Teck.

On Monday, shares in Teck resources were pummelled with the selloff of gold producers and gold bullion. As Teck is not a gold producer, I felt the sudden decrease in share price Monday morning was due more from panic selling than company fundamentals. Since Teck was at the top of my shopping list, I bought 100 shares of Teck Resources (TCK.B) at a cost of $25.30 per share.

Back in January 2011, Teck Resources (TCK) was trading over $61 per share. Teck Resources is now trading at its two year lows. Teck currently has a profit margin of 7.84% and a debt to equity ratio of 40.02. The profit margin is lower than I normally prefer for a company, but that is also reflective of the slowing demand for raw materials. Teck currently pays a dividend yield of 3.604%, with a dividend payout ratio of 64.7%. One feature I like about mining stocks, Teck included, is many pay out their dividends semi-annually instead of quarterly. This will give me a larger dividend for a smaller purchase, and allow me to DRIP my shares.  Teck is also a “dividend growth” company, and raised its dividend in November 2012 by 12.5%.

Barrick Gold (ABX)

Figure 2. Barrick Gold (ABX) - One Year Chart.
Figure 2. Barrick Gold (ABX) – One Year Chart.

Gold producers including Barrick and Goldcorp comprise a significant percentage of the TSX composite index. They are held in many Canadian mutual funds as a significant holding. Barrick and Goldcorp are not junior mining companies. They are in fact, the world’s largest gold mining and gold producers. Whether you personally view gold as a tangible asset or not, is a moot point. Gold’s scarcity has made it a sought after commodity for thousands of years, and in our modern society gold is considered a hedge against global currency risk. Most countries continue to stockpile gold for exactly this reason.

Back in July 2012, I compared the two major gold producers in Barrick Gold vs. Goldcorp. I also compared the two companies in April 2012 in Are Gold Stocks Cheap?  Since then I’ve been waiting for an entry point into the gold producers. Goldcorp is clearly the much better company in terms of fundamentals, and is also a better choice with its much lower debt levels. In fact Goldcorp has very little debt with a debt to equity ratio of only 3.42% and a solid profit margin of 32%. I clearly prefer Goldcorp’s fundamentals over Barrick. Unfortunately Goldcorp also has a much lower dividend yield, currently at 2.13%, compared to Barrick’s yield of 4.49%.

Barrick Gold has had significant management and profitability issues over the last couple of years. In a recent Globe and Mail post, has Barrick Bottomed?, Lou Schizas looked at the problems plaguing the company. In 2011 Barrick Gold paid $7.3-billion to acquire Equinox Minerals.  With retreating Copper prices, and poor drilling results at the Lumwana Mine, the acquisition turned out to be a dud. This caused Barrick to write down over $3.8 billion dollars off its books. Long time Barrick CEO Aaron Regent was promptly ousted. The decline in Barrick on Monday was as much an issue over recent management and the Equinox acquisition, as it was about the decline in gold bullion. That also makes Barrick much more of a potential value play. I purchased a small position of 50 shares in Barrick Gold (ABX), at a price of $20.13.
Reader’s what’s your take? Interested in the Canadian mining sector? Have you pulled the trigger on any mining stocks or gold producers?

Disclaimer: I am long on ABX and TCK.B. 

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