Is Barrick Gold stock oversold?
Written by Andrew Walker at The Motley Fool Canada
The recent fall in the price of gold has sent gold stocks tumbling. Investors who missed gold’s rally earlier this year are now wondering if Barrick Gold (TSX:ABX)(NYSE: GOLD) and its peers are attractive purchases.
Gold has fallen from a closing high of US$2,043 in early March to below US$1,900 in the past few days. The drop came in response to a surge in the value of the US dollar against a basket of international currencies. Gold is priced in US dollars, so it may come under pressure when it becomes more expensive for holders of other currencies to buy.
Another reason for the pullback could be general weakness in equity and commodity markets amid fears that the global economy is heading for a slowdown, led by weakness in China caused by COVID-19 lockdowns and the continuing effects of the war in Ukraine.
Finally, rising interest rates push up returns on fixed income investments. These can compete with gold for investor funds. Gold pays you nothing to own it, so the opportunity cost of holding gold goes up and interest rates go up.
Investors should expect continued volatility, but there are also arguments for gold to rise in the months ahead. Investors are still concerned about inflation. Gold is widely considered a decent hedge for investors to protect their purchasing power. The metal is also considered a good refuge for storing wealth in times of geopolitical and economic uncertainty.
Should you buy Barrick Gold shares?
Barrick Gold is trading at $28.70 at the time of writing, down from $32.70 in early March. The stock is still up 20% in 2022, but a far cry from the $39 it hit in 2020 when gold made its last run at US$2,080 an ounce.
Barrick Gold provided a first quarter update indicating that the company is on track to meet its full year gold and copper production guidance. The average market price for gold in Q1 2022 was US$1,877 per ounce. The average market price for copper was US$4.53 per pound. Gold is at US$1,910 per ounce at the time of writing. Copper is trading near US$4.42 per pound. At these levels, the company achieves good margins and should generate strong free cash flow.
Barrick Gold ended 2021 with zero net debt. In fact, the company is now comfortably in a net cash position and has implemented a new dividend plan that pays out a base distribution plus a bonus determined by the net cash position at the end of each quarter. The Board of Directors raised the base dividend by 11% to $0.10 per share for 2022. Investors will receive a bonus of up to $0.15 per share per quarter. In 2021, the company paid investors a total of $0.42 in additional payouts above the base dividend of $0.36.
Barrick Gold also uses excess cash to buy back shares. The current share buyback program will see the company spend up to US$1 billion.
Barrick Gold owns six of the world’s top 10 gold mines and has significant copper operations that provide a nice hedge against gold volatility. Assuming gold and copper prices remain at or above current levels, Barrick Gold should generate good cash flow in the years to come.
If you are a gold bull, Barrick Gold stock appears undervalued right now. Investors looking to increase their exposure to gold could take advantage of the setback to add Barrick Gold to their portfolios.
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The Motley Fool has no position in the stocks mentioned. Foolish contributor Andrew Walker has no position on the stocks mentioned.