Barrick Gold Corporation (TSX: ABX) is a sector-leading gold and copper producer. In January 2019 Barrick merged with Randgold Resources and in July that year it combined its gold mines in Nevada, USA, with those of Newmont Corporation in a joint venture, Nevada Gold Mines, which is majority-owned and operated by Barrick. Barrick owns and operates six tier one gold mines. It has gold and copper mines and projects in 13 countries in North and South America, Africa, Papua New Guinea, and Saudi Arabia.

Investment rationale

• Bullish momentum in gold prices: gold prices are hovering in a strong bull run, traded well above its long-term as well as short-term crucial support levels of 200-day SMA and 50-day SMA. This indicates that gold has entered a long-term bullish cycle, on the back of increasing inflationary pressure and uncertainties hovering above the interest rate hike. Gold prices have surged ~5.75%, in a month over period. The significant movement in the gold prices will bolter the group’s average realization prices and hence improvement in the financial health of the company.

Gold price chart(as on November 10, 2021). Source: REFINITIV, Analysis by Kalkine Group

• Firm copper prices: Copper prices has also gone up significantly over the past one and half years, on the back of increased industrial demand for the red metal. Also, it is expected that copper prices will remain firm and steady in mid-term to long-term given the robust demand outlook for the metal amid times when supply in limited. Moreover, Copper prices are up approximately 25% on a YTD basis, moving well for Barrick gold.
• Ability to generate higher Free cash flow: ABX’s ROCE (FY0) and WACC spread stood at 11.7%, which is significantly higher and implies that the company’s business model is throwing a lot of free cash flow. Also, a higher spread between ROCE and WACC implies that the company is selecting projects which are carrying potential to generate a higher internal rate of return (IRR).
• Robust risk protection metrices: As of September 30, 2021, the company’s debt/equity ratio stood at 0.22x slightly higher than the industry median of 0.21x. However, the company is not exposed to any balance sheet, as it has robust risk protection measure, with Net Debt is just 0.04x of its EBIDTA and TTM interest coverage ratio stood at 13.65x, implies no balance sheet risk.
• Strong Competitive Advantage: Despite company performance in the quarter just gone by was relatively poor against the comparable quarter of the FY20, still ABX’s reported EBITDA and Net margin were among the best within the gold sector.

Source: REFINITIV, Analysis by Kalkine Group 

• Value opportunity: From the TTM Price to Free Cash Flow standpoint, ABX shares are trading at a discounted valuation to its peers, with TTM Price to Free Cash Flow multiple of the company stood at 14.61x whereas as peer’s median TTM Price to Free Cash Flow multiple stood at 26.35x, implies a valuation gap of

Risk Associated

ABX is exposed to variety of risks ranging from adverse movement in the underlying commodity prices (Gold and Copper), a strength in dollar index against the majors could also have a weigh on the gold prices, increase in interest rate and resurgence in the COVID-19 cases could hamper production, operation and supply chain of the company.

Financial Highlights: Q3FY21

Source: Company Profile

• Lowered Revenue: In Q3FY21, the company reported revenue stood at USD 2,836 million, approximately 20% decline on a YoY basis, on the back of 14% YoY decline in gold sold because of 5% reduction in gold production and 8% reduction in the average gold realization prices.
• Coppers realization prices jumped 21%: In Q3FY21, the company’s average copper realization prices soared up 21% to USD 3.98/lb from USD 3.28/lb in Q3FY20. This has partially offset the losses in average gold realization prices and supported the group’s consolidate revenue during the quarter under consideration.
• Free Cash Flow Up on QoQ, down on YoY basis: ABX’s reported free cash flow in Q3FY21 nudged by ~2,632% to USD 481 million on a sequential quarter. However, down by 63% on a YoY basis.
• EPS down on YoY basis: The company’s reported net earnings per share stood at USD 0.20, a 60% decline from USD 0.50 reported in Q3FY21, mainly because of lower topline and margin contraction on a comparable quarter basis.

Top-10 Shareholders

Top-10 shareholders are holding approximately 25.89% stake in the company, with Van Eck Associates Corporation and Capital World Investors are the major shareholders, holding ~4.71% and 3.22% stake in the company. Institutional ownership in the company stood at 62.90%.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales-based valuation

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation

ABX built upon strong fundamentals with strong balance sheet, higher operating efficiency, and robust risk protection metrices. Moreover, operating cash flow of USD 1,050 million and the free cash flow of USD 481 million for Q3FY21 would further support an already strong balance sheet and the funding of Barrick’s capital allocation priorities.

The recent breakout in the gold prices above USD 1,835/oz which was acting as crucial resistance, which indicates that gold has entered a strong bullish zone, which is a significant favorable development for the company as it will lead to higher average gold realization prices and improved financial health in coming quarters.

From the technical standpoint, ABX shares are trading well above its crucial short-term support level of 50-day SMA and hovering near its 200-day SMA. A crossover above 200-day SMA could bring ABX shares in a long-term bullish zone. Also, leading momentum indicator 14-day RSI hovering on a neutral zone with strong bullish bias at 68.89.

Hence, based on the above rationale, we recommend a “Buy” rating on the “ABX” stock at the closing price of CAD 25.57 (on November 10, 2021).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

1-Year Price Chart (as of November 10, 2021). Source: REFINITIV, Analysis by Kalkine Group.

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid on November 10, 2021, price as well.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.