Warren Buffett’s Berkshire Hathaway Inc (NYSE: BRK.B) recently bought shares of a gold miner. Should investors consider doing the same? –
The latest 13F filing of Warren Buffet’s Berkshire Hathaway Inc (NYSE: BRK.B) is quite interesting for many investors who closely follow the company.
At first glance, we can see the company reduced exposures to financials, most noticeably trimmed on Wells Fargo (NYSE: WFC), JPMorgan Chase (NYSE: JPM), while it also exited Goldman Sachs (NYSE: GS) entirely.
But what is interesting, and perhaps surprising, is the addition of Barrick Gold Corp (NYSE: GOLD) with an initial position of about 20 million shares, equivalent to around US$560 million at the end of the reporting period.
It’s a huge amount to an average person like you and me, but in fact the position only accounted for less than 0.3% of the equity portfolio of Berkshire Hathaway.
Though it is an immaterial position size, the interpretation of it can be meaningful. Warren Buffet has previously been very vocal in expressing his unfavourable views on gold as an investment.
From his perspective, gold is an unproductive asset, therefore a lousy investment.
One may counter-argue that gold mining companies may be different but ultimately, the end product does not produce anything and has fewer industrial uses than other base metals like silver and copper.
So, here in Asia, how do the sizeable Chinese gold miners stack up against Barrick Gold as an investment?
Zijin Mining Group Company (SEHK: 2899) operates metal-mineral resources exploration and mining businesses.
In terms of revenue breakdown, roughly 68% of its revenue was contributed by gold mining and the rest came from base metals mining, smelting, and refining.
It is worth noting that Zijin has proactively pursued growth through its acquisition strategy, in which Moody’s has recently downgraded its credit rating due to the company’s additional capital expenditure.
That means Zijin has taken on a lot of leverage. According to Moody’s:
“So far in 2020 it has completed or announced the acquisition of Continental Gold Inc. for RMB 7 billion in March, Tibet Julong Copper Co., Ltd. for RMB 3.9 billion in July, and Guyana Goldfields Inc. for RMB 1.7 billion, currently in process.”
Zijin’s share price has also underperformed both spot gold and Barrick Gold year-to-date, trading at 23x forward price-to-earnings (PE) ratio with an indicated dividend yield of 2.3%.
Shandong Gold Mining (SEHK: 1787), a state-owned miner, is entirely concentrated on gold mining and production.
In theory, the rising gold price will benefit its business the most. Back in 2018, Shandong Gold and Barrick entered into a mutual investment agreement.
In 2017, the two companies were also partners at the Veladero gold mine in Argentina. That said, Barrick recently sold most of its Shandong Gold shares.
Shandong Gold has much less financial leverage than Zijin Mining but still has more of a debt burden than Barrick Gold.
Shangdong Gold shares have outperformed both spot gold and Barrick year-to-date, trading at 28x forward PE with an indicated dividend yield of 0.36%.
Foolish bottom line
To be fair, we do not know if the decision to invest in Barrick Gold was the decision of Warren Buffet himself, or someone else in the executive team.
Regardless, adding a gold mining company seems to make sense for diversification for an equity portfolio that is highly concentrated in technologies and financials.
As I previously wrote, we are living in a very favourable time for the yellow metal with a highly uncertain economic environment, weaker US dollar and falling real yields.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Lonnie Yen doesn’t own shares in any companies mentioned.
The Motley Fool Hong Kong Limited(www.fool.hk) 2020