The shares of Barrick Gold Corporation (NYSE: GOLD) have declined by about 21% year-to-date, roughly in line with the broader S&P 500 due to weakness in the market for gold – which accounts for over 90% of Barrick’s revenue and remains the primary lever of the stock price. Gold appears to be out of favor as an investment avenue, with prices down by almost 7% year-to-date and by about 16% from recent highs seen in March, trading at about $1,670 per ounce. Central banks around the world have been raising interest rates amid a need to fight soaring inflation. This, in turn, has led to a stronger U.S. dollar and rising treasury yields – both considered safe-haven assets – putting pressure on the price of non-yielding assets like gold. For perspective, yield on 10-year U.S. treasury bonds, a benchmark for borrowing costs, has risen to slightly above 3.5% for the first time in over a decade. Moreover, Barrick’s cost base is also seeing pressure due to an increase in energy prices and supply chain issues.
However, we think there is good reason to look at Barrick stock following its decline. The stock currently trades at about 12x consensus 2022 earnings, down from levels of over 24x in 2020. Gold prices could look up in the medium term, given the tough global economic outlook and mounting macro uncertainties. U.S. GDP has contracted over the last two quarters straight with consumer confidence remaining weak. There are also concerns that Russia might escalate its war on Ukraine after its army suffered multiple setbacks earlier this month. These factors could make gold a bit more appealing, helping price realizations for Barrick, which is one of the world’s largest gold producers. Barrick also appears well positioned to navigate a potential recession and the rising rate environment, given that it has been deleveraging its balance sheet in recent years. The company’s net cash position (cash less debt) stood at over $600 million at the end of Q2.
Barrick’s move to scale up its copper business could drive some upside for the stock. Although the business accounts for under 10% of Barrick’s overall sales, it is growing relatively fast. Over Q2 2022, copper production rose 25% year-over-year to 120 million lbs and the company noted that it was on track to meet its copper production guidance targets of 420 – 470 million lbs for the year. Demand for copper is likely to rise in the long term as the global economy gradually substitutes hydrocarbon usage with renewable energy solutions and electric vehicles, which both have relatively high copper content. Barrick is likely to have an edge over other miners in the copper space, considering that copper often occurs alongside gold in large-scale deposits. While copper prices have declined year-over-year, the strong copper production helped the company post slightly stronger than expected results over Q2 2022, with earnings per share standing at $0.27 share, up from $0.23 a year ago.
We have a $21 price estimate for Barrick Gold, which is about 40% ahead of the current market price. See our analysis on Barrick Gold valuation for more details. Also, see our analysis of Barrick Gold Revenues for more details on the company’s key revenue streams and how they have been trending.
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