Soaring yields hit Barrick Gold stock. Is this an opportunity to buy?
The actions of Barrick Gold Corporation (NYSE: GOLD) fell about 21% year-to-date, roughly in line with the entire S&P 500 due to weakness in the gold market – which accounts for more than 90% of Barrick’s revenue and remains the main driver of the share price. Gold appears to be out of favor as an investment avenue, with prices down almost 7% year-to-date and around 16% from recent highs seen in March, trading at around $1,670 an ounce. Central banks around the world have raised interest rates amid the fight against runaway inflation. This, in turn, led to a stronger US dollar and higher Treasury yields – both considered safe-haven assets – putting pressure on the price of non-performing assets like gold. For perspective, the yield on 10-year US Treasury bonds, a benchmark for borrowing costs, rose slightly above 3.5% for the first time in more than a decade. Additionally, Barrick’s cost base is also under pressure due to rising energy prices and supply chain issues.
However, we believe there are good reasons to watch Barrick’s stock after its decline. The stock is currently trading at around 12x 2022 consensus earnings, compared to levels over 24x in 2020. Gold prices could rise over the medium term, given the challenging global economic outlook and macroeconomic uncertainties growing. US GDP has contracted for the past two consecutive quarters as consumer confidence remains weak. There are also fears that Russia could escalate its war against Ukraine after its army suffered multiple setbacks earlier this month. These factors could make gold a bit more attractive, which would help price realization for Barrick, which is one of the largest gold producers in the world. Barrick also appears well positioned to navigate a potential recession and rising rate environment, given that it has deleveraged its balance sheet in recent years. The company’s net cash (cash less debt) was over $600 million at the end of the second quarter.
Barrick’s move to expand its copper business could drive the stock higher. Although the business represents less than 10% of Barrick’s overall sales, it is growing relatively rapidly. During the second quarter of 2022, copper production increased 25% year-over-year to 120 million pounds and the company noted that it was on track to meet its copper production targets from 420 to 470 million pounds for the year. Copper demand is expected to increase over the long term as the global economy gradually replaces the use of hydrocarbons with renewable energy solutions and electric vehicles, both of which have relatively high copper content. Barrick is likely to have an advantage over other miners in the copper space, given that copper often occurs alongside gold in large-scale deposits. While copper prices have fallen year-over-year, strong copper production helped the company post slightly better-than-expected results in the second quarter of 2022, with earnings per share rising to $0.27 per share, down from $0.23 a year ago.
We have a price estimate of $21 for Barrick Gold, about 40% ahead of the current market price. See our analysis on Barrick Gold valuation for more details. See also our analysis of Barrick Gold Revenues for more details on the company’s main sources of income and their evolution.
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