Why Barrick Gold Stock Is A Buy While Bullion Fucks $ 1,800
Written by Brian Paradza, CFA at The Motley Fool Canada
The market price of gold rallied to over US $ 1,800 this week. This could be a significant price for the world’s second largest producer of bullion, Barrel gold (TSX: ABX) (NYSE: GOLD) whose stock price has fallen 12% so far this year.
In its last quarterly earnings release on August 9, Barrick acknowledged that a significant contribution from its copper assets sets it apart from its industry peers. Retail supports a downside call to buy on miner’s shares today. However, the most important reason I would buy Barrick Gold shares today is its strong ability to generate cash flow when bullion stays above US $ 1,800 an ounce.
Barrick Gold will make more money at today’s metal prices
The company is expected to make more money than expected in 2021 if bullion prices remain above US $ 1,700 an ounce this year.
The company maintained its forecast and production forecast for 2021 earlier this month. It expects to produce between 4,400,000 and 4,700,000 ounces of gold this year at an all-inclusive sustaining cost (AISC) of between US $ 970 and US $ 1,020 per ounce. ABX will remain very profitable if gold prices remain high this year.
More importantly, management’s forecast has been established using an average bullion price of US $ 1,700 for this year.
The company has revealed that a US $ 100 yellow metal market price surge could add approximately US $ 620 million to Barrick’s earnings before interest, taxes, depreciation and amortization (EBITDA) for the year.
However, the company achieved much better prices in the first half of the year and continues to build up huge free cash flow as commodity prices remain as firm as they are today.
Watch the growing cash flow
Rising precious metal prices have had a dramatic impact on Barrick’s financial strength and cash flow generating ability over the past five years, to the point that even Warren Buffett Berkshire Hathaway made a play on the ABX stock in 2020.
Just five years ago, Barrick was at a net debt outflow of US $ 5.5 billion in 2016. Fast forward to December 2020 and the company was sitting on a positive net cash position of US $ 33 million. of US dollars. It had over US $ 5.2 billion in cash and cash equivalents on its balance sheet.
The trend of growing liquidity is expected to continue in the near term. Analysts forecast a net cash position of $ 2.9 billion for ABX by the end of 2022.
What to expect if you buy stocks in August
If you buy Barrick Gold shares today, you can expect to earn a quarterly dividend of US $ 0.09 per share in September, a return of capital of US $ 0.14 per share again in September, a another regular dividend of US $ 0.09 in the fourth quarter and the final return of $ 0.14. of capital before the end of the year.
The company is disbursing some US $ 750 million under an ongoing capital repayment program. The company will determine a registration date for the final installment in November.
If stocks are purchased prior to the August 31 registration date, they may be eligible for such âdividendsâ before year end. Investors could receive a total of US $ 0.46 in cash per share for a return of 2.3% over four short months.
Analysts expect the company to pay around US $ 0.44 in dividends in 2022. At today’s prices, next year’s dividend payments could earn an additional 2.2% for the year. .
That said, I think the bulk of the potential returns from holding the miner’s stock could come in the form of capital gains from price appreciation. The analysts’ consensus price target on ABX is C $ 36.24, indicating a potential rise of 43% over the next 12 months.
Analysts’ consensus price targets point to a potential return of 43% on ABX stock over the next 12 months. Source: Koyfin.
A rally in gold prices could trigger another rally in Barrick shares. The company is already in a very good position in terms of earnings and cash flow at today’s market prices. Add that to its improved copper economy and sustained development spending and a downside buy game on ABX seems like a long term profitable trade to do today. Stocks have rallied to match analysts’ targets in the recent past. They might do it again if sentiment returns to industry stocks.
The post Why Barrick Gold Stock is a Buy as Bullion Raises $ 1,800 first appeared on The Motley Fool Canada.
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Foolish contributor Brian Paradza has no position in the stocks mentioned. The Motley Fool owns shares and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: $ 200 long calls in January 2023 on Berkshire Hathaway (B shares), $ 200 short buys in January 2023 on Berkshire Hathaway (B shares), and $ 265 short calls in January 2023 on Berkshire Hathaway (B shares).