Avoid This Popular Gold Stock at All Costs: ABX

If you consider yourself a "gold bug," then you may think it's a good time to invest in the biggest gold-producing companies, since gold and large-cap stocks are popular safe havens in uncertain times like these. But when it comes to gold stocks, assuming bigger is better could be dangerous. Indeed, there are several large-cap gold stocks I'd steer clear of right now, because all they're in a position to do in the long-term is disappoint.

The one I'd particularly like to warn you about is Barrick Gold Corp. (NYSE: ABX). Barrick has actually done well recently, returning an average of more than 30% for the past several years. I think it's highly unlikely, however, it will come anywhere near repeating such a performance. In fact, you could even lose money by owning the stock going forward.

Barrick has a couple major strikes against it, including the likelihood of a massive slowdown in earnings growth. Although the company is on track to grow earnings 55% this year to $4.90 a share, from $3.28 a share in 2010, analysts project an annual growth rate of only 1.5% from 2012 through 2016. This is because capital costs for development projects are quickly mounting. One of the latest examples is a new mine near Pueblo Viejo in the Dominican Republic, where damage from heavy rains is likely to delay completion of the project for six months until mid-2012. Between repairs, clean-up and finishing off construction, costs for the Pueblo Viejo mine are now expected to be as high as $3.8 billion, 15% more than the $3.3 billion Barrick initially thought it would spend.

And that's certainly not the worst example. Estimated costs for another new mine to be completed in Pascua Lama, Chile, in 2013 have shot up nearly 39% from $3.6 billion to $5 billion. What's more, the earlier $3.6 billion price tag was an increase of about 20% from a prior estimate. According to management, the rising cost of the Pascua Lama project stems from an underestimate of how much structural steel and other materials were required to build the mine. A high-altitude location, harsh weather and strong winds are the reasons more building materials are needed, management says.

Barrick Gold Corp. has also upwardly revised its cost estimate for a third project, the construction of a mine in Cerro Casale, Chile, slated to get underway at the end of 2012. Costs for the project are now expected to reach $6 billion, 43% more than the prior estimate of $4.2 billion. Management says rising materials prices are a key factor in the ballooning price tag for the Cerro Casale mine.

Another obstacle for Barrick Gold Corp. is controversy over its mining practices and alleged human rights abuses, which may make it harder for the company to get the permits it needs to operate. For instance, a mine in Papua New Guinea has had a particularly difficult history because of claims by local leaders of alleged damage to the environment from improper disposal of mining waste. These leaders, along with Amnesty International and other human-rights groups also say they have documented cases of violence against Papua New Guinea locals by Barrick Gold security guards.

Risks to consider: In addition to the other issues I've raised, I believe gold prices are much more likely to fall off, or even nosedive, than climb in the long-term. This would obviously hinder the profitability of all gold producers, including Barrick Gold Corp.

Action to Take --> I'm generally bearish on gold, but I believe Barrick would be among those hit hardest by falling gold prices because of its high production costs, poor earnings growth prospects and alleged human rights violations.

In addition to a huge drop-off in earnings growth, analysts also project large declines in the growth of revenue, cash flow and dividends. Revenue, which climbed at a 19% pace for the past five years, is only expected to rise an average of 4% in each of the next five years. The annual rate of cash flow growth is projected to slow from 22.5% to 5.5%, and dividend growth is expected to decelerate from 13.5% to 7%.

But if you disagree with me and are bullish on gold and are even THINKING about buying Barrick Gold, then think again. It's near the top of my list of stocks to avoid. Those who do decide to buy shares are probably in for disappointment.