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IAMGOLD Corporation (USA) (IAG), Barrick Gold Corporation (USA) (ABX): Is it Wise to Invest in the Business of Bling?

I’ve never been much of a fan of investing in precious metals and stones. Such things derive most of their value from the price that the rich are willing to pay for them. I would much rather own companies that provide valuable services that genuinely improve the quality of human life. Enterprises like Waste Management, Inc. (NYSE:WM) and The Procter & Gamble Company (NYSE:PG) make my life immeasurably better, and I like owning businesses that do that.

Just because I don’t think something has value doesn’t mean others won’t.  So lets see if there any companies in the business of bling that deserve your investment dollars.

For the 49er in all of us

IAMGOLD CorporationGold miners have seen their stocks take a beating recently, but I still find IAMGOLD Corporation (USA) (NYSE:IAG) to be an interesting investment idea. Right now it yields 6.1%, with a payout ratio of only 41%.

With a market cap of $1.7 billion IAMGOLD Corporation (USA) (NYSE:IAG) is much smaller than the largest gold miners in the world. In fact, the largest gold mining company in the world is Barrick Gold Corporation (USA) (NYSE:ABX), which is about 10 times bigger than IAMGOLD.

And yet IAMGOLD has much better margins than Barrick Gold Corporation (USA) (NYSE:ABX). The five year average net profit margin for IAMGOLD Corporation (USA) (NYSE:IAG) is 25.4%, compared to just 6.6% for Barrick.  You have to love seeing the little guys outperform giants.

Turning to the balance sheet, you will notice IAMGOLD Corporation (USA) (NYSE:IAG)’s cash and equivalents stand at $648 million, and it has $215 million worth of gold bullion. With current liabilities of only $317.9 million, I can’t see IAMGOLD Corporation (USA) (NYSE:IAG) piling on debt anytime soon.

IAMGOLD is also selling a substantial discount to book value. Its price to tangible book value is 0.44, compared with 1.19 for Barrick. Most of the tangible book value in IAMGOLD is, of course, in assets that derive most of their value from the market price for gold. The market price for gold has been nosediving, and has a future wrought with uncertainty. Such a large discount to tangible book provides a nice cushion.

All that glitters is not gold

Diamonds also glitter, and if you believe the marketing, they are forever. For a very long time De Beers, which is 85% owned by Anglo American, (a large British mining company) had a complete stranglehold on the diamond market.

Times have changed, though, De Beers has seen its market share decline from nearly 90% in the 1980’s to less than 40% today. During this time other miners have moved on the scene, among them multinational mining giants Rio Tinto plc (ADR) (NYSE:RIO) and BHP Billiton plc (ADR) (NYSE:BBL). As of April 10, 2013 BHP is no longer in the diamond business, having sold all of its diamond related assets to Dominion Diamond Corp (NYSE:DDC).

Most of the world’s diamond mining activities comes from large multinational mining companies for whom the diamond business is only a small piece of their pie. This means that there are very few pure plays on diamonds out there, but one does exist in Dominion Diamond Corp (NYSE:DDC).

At first glance, Dominion Diamond Corporation looks pretty cheap. You don’t see a company with a price to earnings ratio of 2.46 very often. Its price to tangible book ratio sits just below one. Purchasing a solid company for less than book value is always a treat, but is Dominion Diamond a solid company?

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