the shares of Barrick Gold Corporation (NYSE: GOLD) are down 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 more than 90% of Barrick’s earnings and remains the stock’s main leverage . Gold appears to be out of favor as an investment opportunity, with prices down nearly 7% to date and about 16% from recent March highs, priced at around $1,670 an ounce. Central banks around the world have raised interest rates to combat rising inflation. This, in turn, has led to a stronger US dollar and rising government bond yields – both considered safe havens – which have put pressure on the price of non-performing assets such as gold. In perspective, 10-year US Treasury yields, a measure of borrowing costs, have risen to just above 3.5% for the first time in more than a decade. In addition, Barrick’s cost base is also under pressure from rising energy prices and supply chain issues.
However, we think there is good reason to look at Barrick’s stock after the decline. The stock is currently trading at about 12x the consensus earnings for 2022, down from more than 24x in 2020. The gold price could move higher in the medium term given the difficult global economic outlook and mounting macro uncertainties. US GDP has contracted for the past two consecutive quarters and consumer confidence remains weak. There are also concerns that Russia could escalate its war against Ukraine after its military suffered multiple setbacks earlier this month. These factors could make gold a little more attractive and help price realizations for Barrick, one of the world’s largest gold producers. Barrick also seems well positioned to navigate a potential recession and rising interest rates as it has been deleveraging its balance sheet in recent years. The company’s net cash position (cash minus debt) was over $600 million at the end of the second quarter.
Barrick’s move to scale up its copper business could have a positive effect on the stock. Although the company accounts for less than 10% of Barrick’s total revenue, it is growing relatively quickly. In the second quarter of 2022, copper production increased 25% year-over-year to 120 million lbs and the company noted that it was on track to meet its copper production targets of 420 – 470 million lbs for the year. Demand for copper is likely to increase in the long run 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 likely has an edge over other miners in the copper space, as copper often coexists with gold in large-scale deposits. Although copper prices have declined year-over-year, strong copper production helped the company deliver slightly stronger-than-expected results in the second quarter of 2022, with earnings per share of $0.27 share, up from USD 0.23 a year ago.
We have a price estimate of $21 for Barrick Gold, which is about 40% higher than the current market price. See our analysis of Barrick Gold valuation for more details. See also our analysis of Barrick Gold earnings to learn more about the company’s key revenue streams and how they’ve been trending.
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