This article shares my research into a real stock, Barrick Gold, with real, up-to-date data (where possible). It’s aimed at the beginner investor, so I’ve gone on to explain some of the ideas in a bit more detail. Just to be clear, there is no fixed method of researching a stock. Every investor and trader, whether long term or short term, will have their own approach.
So why Barrick Gold? There are thousands of stocks I could have chosen to base my research on, but the vast majority of stocks are not halal to trade, so there is no point considering these. There are some stocks that are complicated to understand, and therefore not suitable to consider given this article is aimed at the beginner investor. Gold, meanwhile, is something that everyone understands and is considered a safe investment. Unlike investing into gold, investing in the stock market is volatile. So in a way, investing in a gold stock could be considered more stable and perhaps a suitable stock to invest in for a beginner.
The article is presented in two parts:
An attempt to establish whether a stock is halal to invest in
An attempt to determine whether a stock will be profitable
Barrick Gold is a mining company. According to their website, their mission involves finding, developing, and owning gold and the gold mines. Barrick Gold further says they exploit gold resources to achieve mutual benefits with their hosts. According to their website, Barrick has gold and copper mining operations and projects in 13 countries in North and South America, Africa, Papua New Guinea and Saudi Arabia. Their diversified portfolio spans many of the world’s prolific gold districts and is focused on high-margin, long-life assets. Barrick Gold's shares are listed on the New York Stock Exchange.
Establishing whether Barrick Gold is halal to invest in
1.1. Is the nature of Barrick Gold halal in the first place?
Barrick is involved in extracting natural resources. There is nothing inherently haram about that. So, at this point, to rule out investing in this stock, there would need to be something very unethical about how they source their physical and human resource. For example, Islam doesn’t allow people to sell something they do not own (as in the case of CFDs). Any given mine itself may not be owned by Barrick (it usually remains the property of the government), but the government may issue a license for a fixed period of time to exploit the mine. There are no problems with this; the miner makes an offer, and the government accepts (or rejects) the offer. Offer and acceptance is the basis for contracts in Islam. No problems here.
What about forced labour? Mines can be notorious for slave and/ or child labour. Barrick appears to be doing work to discourage child minors on several fronts. Further, the company is actively trying to replace humans with as many machines as it can. So child labour or slave labour appear to be an unlikley issue with Barrick.
1.2 What is its debt to asset ratio?
Some scholars say that for a stock to be halal it must not have debts exceeding ⅓ of its assets. There has been much discussion surrounding how the figure of ⅓ has been reached. This is beyond the scope of this article. In any case, Barrick Gold’s debt:asset ratio was 16.6% at the start of 2020. Do bear in mind that throughout the year, this figure may change. Small changes are difficult to discern because a company may file accounts once a year only. If, however, a company borrows a large sum of money, then quite often it does make the news. Companies often publicise their borrowing to let stakeholders know they are in a phase of growth, which gives investors confidence. However, in the case of Carnival, the cruise ship operator, borrowing money ressaured stakeholders that they would not go under (no pun intended) after their business was badly impacted by Covid19.
1.3 Does it ‘earn’ money from haram sources?
Even though Barrick Gold’s income comes from the sale of halal products on the face of it, we cannot rule out the possibility that some of its income may come from haram sources. This needs to be looked into. For example, after selling gold or copper (which in itself is permissible to sell), Barrick Gold may keep the proceeds of the sale in a bank. The bank may then pay interest. If the interest money is a significant amount and therefore comprises a significant amount of Barrick Gold's income, then investing in Barrick would not be allowed (similarly, paying a significant amount of interest is not allowed either). If, however, the interest accumulated is insignificant (under 5%), then one can invest in the company, but must give away the proportion of impermissible income to charity without expecting reward. For instance, if a company ‘earned’ 3% of its income from usury, then 3% of your income from that stock needs to be given away in charity. Mufti Taqi Usmani makes the point that any interest income should be ‘incidental’, meaning it should not be part of a company’s business model to intentionally ‘earn’ income from interest.
According to Hargreaves Lansdown, there is no “applicable” data for the ‘net interest’ section of the annual report. This could be because Barrick did not receive interest from banks, or perhaps because any received interest would be too insignificant to include in the annual report. Either way, it looks like income from interest is under the 5% mark, and probably closer to the 0% mark.
Does Barrick Gold pay interest?
Yes it does. And this is where it gets really tricky. A small business may have straightforward lending transactions: X amount borrowed with Y% APR over Z amount of time.
For large corporations, it’s quite different. In addition to the above type of arrangement with their bank, they tend to have additional credit facilities in place with various lenders. For example, Page 192 of Barrick’s annual report reads:
“Acacia Credit Facility In January 2013, Acacia concluded negotiations with a group of commercial banks for the provision of an export credit backed term loan facility (the “Facility”) for the amount of $142million. The Facility was put in place to fund a substantial portion of the construction costs of the CIL circuit at the process plant at the Bulyanhulu Project. The Facility has a term of seven years and, when drawn, the spread over LIBOR will be 250 basis points. The Facility is repayable in equal installments over the term of the Facility, after a two-year repayment holiday period. At December31, 2014, the full value of the Facility was drawn. During 2015, $14million was repaid. During 2016, $29million was repaid. During 2017, $28million was repaid. During 2018, $28million was repaid. During 2019, $29million was repaid. In January 2020, the final installment of $14million was paid.”
To make matters more confusing, corporations can issue bonds (sometimes referred to as “notes”). This is a way for corporations to borrow money from non-bank lenders and may be used to borrow money at a lower rate, to have greater overall control of their borrowing or when banks won’t lend a corporation money. Just in case this is not confusing enough, large corporations may set up subsidiaries and each subsidiary may issue bonds. This makes it really tricky to work out how much debt a company actually has. Notice the table below and the year of maturity (when all the money has to be repaid with interest) is as far away as 2043. So, if a note was issued in 2020, which matures in 2043 at an interest rate of 5.75%, this means on an annual basis, Barick is paying the equivalent of 0.25% interest a year.
Mufti Taqi Usmani says Muslims need to voice their objection to impermissible methods of earning or acquiring money (and by extension, any immoral corporate behaviour), possibly at the AGM. He further explains in ‘An Introduction to Islamic Finance’ (p.204-212) that if an investor opposes such transactions but is overruled by the majority, then the investor cannot be held responsible for the decision of the corporation.
He also explains that it’s near impossible to work out how much of the investor's income (dividend or capital growth) is derived or attributable to impermissible borrowing, so to attempt to find this out is futile. For peace of mind, an investor may wish to donate a portion of their income from stocks such as Barrick Gold, but make sure the debts of the company does not exceed 1/3 of its assets.
Barrick Gold’s AGM was held on 5 May 2020.This article was written 5 months later. However, we can assume the 2021 AGM will also be in May (though with Covid19, we can’t be sure when, or if, it will take place for sure).
1.4 Does Barrick have some illiquid assets?
Scholars such as Mufti Taqi Usmani insist a company needs to have some illiquid assets (other scholars, meanwhile, have said this is not a requirement). To be on the safe side, let us assume some illiquid (tangible) assets are required.
Barrick Gold’s physical assets exceed $27b in value. I think we can safely say it possesses plenty of illiquid assets.
The above encapsulates the Islamic considerations investors should pay attention to, as suggested by the likes of Mufti Adam of Leicester, UK, Mufti Taqi Usmani of Kerachi, Pakistan and others. There are other scholars who differ (as mentioned above).
The rest of the article will focus on commercial considerations.
2.1 Share Price & News
When I consider a stock, I specifically look at the five year stock price. I will glance at the longer and shorter term graphs, too, but I’m mostly interested in the five year graph. There are a few reasons for this: 1) If a company cannot provide at least five years of share price data, then sometimes it means it is a pretty new business. And new businesses are more of a risk.
2) If a company can provide a 15 or even a 20 year graph of its share price, it’s obviously been around a long time. However, the economic landscape does not stand still and often undergoes changes in cycles. Over a 20 year period, the economic landscape would have changed so drastically that some parts of the graph may be irrelevant. To prove this point, consider the company Nokia. In 1998, it was the largest phone maker in the world (and one of the most valuable companies in the world, too). But within 10 years, competitors were aggressively eroding its market share. The landscape had totally changed. The hardware and software technology had changed and so, too, did the network technology. Nokia, unfortunately, had not moved with the times, and as a result, had been left behind. A period of five years can be enough to usher in completely new technologies and alter how we live and work. The likes of Facebook/ WhatsApp and Uber, for example, have helped change the social landscape in a relatively short time frame.
3) I also use the five year graph to get an idea of the average share price. The stock market can be very sensitive to news - both good and bad. Take Boohoo as an example. One single newspaper report was all it took to tank the share price some 40%. It took a few weeks to recover somewhat. One-off events can cause huge fluctuations in the share price, but quite often the price recovers to justified levels soon enough. Using a five year average share price gives a more realistic value of a company and helps to contextualise wild swings in share price due to one-off events.
Fluctuations within the graph are to be expected. But it’s the drastic changes we need to look out, and account, for. In 2020, that’s easy. The global pandemic caused almost all stocks to decline, but could there be anything else behind the movement? In the pharmaceutical industry, for example, a disappointing drug trial can cause share prices to go down. It’s interesting to learn why a stock shoots up. But what you really need to concern yourself with is why a stock shoots down. The former makes you money, the latter loses you money.
Also, we need to observe the general trend of the graph. If it’s been declining for the last five years, you have to ask how likely it is you will make money with that particular stock.
We also need to see what kind of activity the company has been involved in for the last 5 years. So, the graph above shows activity such as partnerships with fellow miners, acquisition of other mines, appointments, profits guidance and so on. None of these things are particularly unique to Barrick Gold.
In short, for me, a five year graph shows enough history to give me confidence, yet shows a company’s realistic value.
In the case of Barrick Gold, there’s nothing really out of the ordinary. I can proceed to the next stage.
2.2 Market Performance
It’s well known that past performance is not a guarantee of future performance. Even so, it can be interesting to see how your chosen stock has been performing against set criteria. Over the last year, the return on Gold was 65%. In contrast, other metals returned 27.3% and the US market as a whole returned 20.7%.
What’s important to bear in mind is that the price of gold and the share price of a gold mining company are not the same thing. Gold, for instance, does not have to deal with issues such as bad management or allegations of fraud. A gold miner, meanwhile, could theoretically have to deal with those issues and more. But given that we’re dealing with a company whose share price can be tracked back to 1985 (when their share price was $0.59), I think it’s safe to say Barrick are interested in the long term.
The volatility is also relatively low compared to some other stocks. In the last year, the price movement has been in the $10 range per share.
2.3 Valuation
The fair share price is a big factor in deciding whether to buy a stock. If you get caught in the hype of share price rises (as was seen with shares such as Tesla in August 2020 ($498 per share)), it could mean overpaying for a stock only for that stock to nose dive. That’s not to say the share price won’t recover again, but it could take a very long time.
I tend to go for stocks that are undervalued. That gives me a lot of confidence going forward that I can make money on the stock since the stock market tends to rise on average 5% a year.
Working out the fair value of a company (and therefore its share price) is no easy task. Personally, I’m happy to let analysts do the number crunching and and work with those figure at the end. Every time I’ve looked into the methodology, I’ve been happy enough with its soundness.
Barrick Gold, at the time of writing this article, is some 24.6% overvalued. Typically, this would be off putting for me. But at times of uncertainty (global pandemic, double digit recession, US presidential election and transition to a new government), the safety of gold (or in this case, a gold related stock) may balance out the undesireability of an overvalued stock.
2.4 Price To Earnings Ratio (...and other similar metrics)
This is perhaps the most common metric used by DIY investors (and possibly the least understood) to determine whether a stock is worth its price.
The website Investopedia explains it brilliantly:
“In essence, the price-to-earnings ratio indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company’s earnings. This is why the P/E is sometimes referred to as the price multiple because it shows how much investors are willing to pay per dollar of earnings. If a company was currently trading at a P/E multiple of 20x, the interpretation is that an investor is willing to pay $20 for $1 of current earnings.”
Meanwhile, the SimplyWallStreet website explains that the P/E calculation does not reflect how much cash a company possesses, or how much money it owes. This is potentially problematic for a Muslim. If a company has huge debts, then looking at the P/E alone is not sufficient in determining if a stock is halal. Also, if a company has a lot of cash in the bank, it is far more secure compared to a company that has to constantly borrow money to stay afloat. But the P/E ignores these factors. Theoretically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings. One thing for certain, though, is that a higher P/E ratio indicates high expectations from a company in the future.
In any case, Barrick’s P/E stands at 11.2x.
Another interesting metric is Price to Growth. For Barrick, this stands at -0.7x. This metric looks at how much the earnings will increase by. In fact, 13 different analysts reckon the earnings will decline by 16.8%.
2.4 Past Performance
One metric that is easy to understand is how profitable a company is. A company can be unprofitable (which is the standard phenomenon for a new business) but if it can’t reach profitability at all, investors and lenders will eventually get fed up and withdraw funding.
There is also the phenomenon where a company is profitable, but barely. With companies like that, all it takes is a one-off negative event (fire, pandemic, etc.) to cause it to become unprofitable (which then affects share prices).
In the case of Barrick, it’s operating at a healthy 39% profit margin.
2.5 Return on Assets and return on capital employed
For any asset-heavy company, it’s not a bad idea to look at returns on assets and returns on capital employed. For miners, very expensive equipment is employed (assets). The higher the return on those assets, the better it is for bottom line profits.
2.6 Debt to Equity
One of the main metrics I look for is the debt to equity ratio. Shariah scholars say it should be under 1/3 for it to be considered permissible. Even without shariah considerations, the level of debt should be a big consideration. The more debt a company has, the more it has to pay to service those debts. This can impact profitability in a big way. Many companies have gone bankrupt due to the burden of its debt.
In the case of Barrick,it is 16.6%.
2.7 Balance Sheet
Barrick has $24.7b of physical assets. The debts can be easily covered by the assets. All in all, looking very healthy.
2.8 Dividend
Because of my trading strategy, dividend is not a big consideration for me. Some investors like to hold stocks for a long time, so it is important for them to receive an income from that stock in the interim. As I’ve mentioned in other articles, I’ve had my fingers burnt in the stock markets previously. So now, I’m very active - trading (or at least checking the markets) pretty much every day. I rarely hold a stock long enough to qualify to receive a dividend. Nonetheless, if a company is able to pay a dividend, it suggests its financial position is decent. In Barrick’s case, the dividend is at a very small 0.71%.
2.9 Management
It’s always a good idea to check out the management of the organisation you are about to deal with. Recently, the share price of Aston Martin shot up due to a change in the management. This shows how much the share price is tied to the perceived effectiveness of management. In the case of Barrick Gold, the management have been long serving.
2.10 Ownership
It can be interesting to see who owns shares. If a lot of shares are owned by employees, that’s usually a great sign as it means they have a lot of confidence in the company.
When external stakeholders own shares, it is usually large funds. This can also be a good thing (because skilled analysts are basically saying this is a worthwhile company to put money into). Having said that, one look at the investors that held shares in Luckin Coffee tells you that the stock market is so unpredictable that so-called expert analysts can get it wrong. Badly wrong.
2.11 Recent Insider Transactions
People need to sell shares for all sorts of reasons (such as divorce settlements). So when insiders sell, that automatically is not a warning sign. But if all the top management people begin to sell at the same time, one has to wonder if management know something everybody else doesn’t.
Final thoughts
In writing this article, I’ve had to delete up to 10 sections just to keep the length of the article somewhat reasonable. There are many more metrics and factors that one can take into consideration before investing. Even after being diligent with the analysis, it can still be possible to get it wrong. Unfortunately, the stock market does not behave in a rational way.
The purpose of this article is not to recommend Barrick Gold one way or another. Rather, the idea was to walk beginners through how stock research might be approached, how much work is involved and how tricky it can be. After all this, the investor must still risk their money and buy the stock!
I know whether I’ll be buying Barrick Gold shares or not, but crucially, I don’t tell people to buy (or not buy) a particular stock.
Happy investing!
[If you're interested in investing in the stock market but feel you need some guidance, our free 30 Day Trading Programme coulld be for you! In it, you will learn about the Islamic Pinciples of Investing, Basics of the Stock Market and how to use a trading platform to buy and sell shares].
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