Barrick Gold: Buy The Breakout

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About: Barrick Gold Corporation (GOLD)
by: SomaBull
Summary

In my article last month on Barrick Gold, I discussed how the early January sell-off was expected, and it was a great opportunity to rebuy. Since then, the stock has returned 15%.

The catalyst for GOLD will continue to be the rapid reduction in net debt as well as the exceptional cash flow generation from its portfolio of high-margin gold assets.

We have two important price levels to watch, and they are in the same vicinity. A 3% increase in GOLD clears both, which would be tough for shorts to defend.

Barrick Gold (GOLD) remains one of my favorite stocks in the gold mining sector.

In my article last month (Barrick Gold: It's Time To Reload), I discussed how the early January sell-off (post-merger with Randgold) was expected, and I considered it a great opportunity to rebuy or acquire more shares of GOLD.

Since then, the stock has returned almost 15%, far surpassing the performance of the NYSE Arca Gold Bugs Index (which has also seen a strong run).

(Source: YCharts)

GOLD has been crushing it since the September 2018 lows, as it has increased by almost 40%. The HUI has generated significant returns since then as well, but GOLD has been a clear leader. As a side note, the Nasdaq is down 8% by comparison.

(Source: YCharts)

It's not too late to buy GOLD; in fact, the shares are on the verge of breaking out, which could catapult the stock. Before I discuss the technical picture, I just want to recap the strong fundamentals that support additional appreciation in Barrick's share price.

Continued Debt Repayment And Strong Margins

The catalyst for GOLD will continue to be the rapid reduction in net debt as well as the exceptional cash flow generation from its portfolio of high-margin gold assets.

Net Debt

Barrick is undervalued because investors are still pricing the stock according to where the debt load used to be, not where it's at today and certainly not where it's trending.

The Barrick/Randgold merger just closed on the 1st of this year, so we don't have official combined financial figures for the company yet. However, factoring in the cash and debt positions of both companies at the end of Q3 2018, the combined net debt stood at $3.35 billion. Compare that to the $11.85 billion figure just six years ago. This updated total also doesn't include any free cash flow from Q4 - as earnings for the last quarter haven't been released yet. It's possible that net debt is now close to the $3 billion mark, or just below that level. GOLD generated $319 million of free cash flow in Q3 of last year, which definitely supports the possibility that net debt could now be around $3 billion.

(Source: SomaBull)

Portfolio Of High-Margin Gold Mines

All of this free cash flow is being driven by Barrick's stable of high-margin mines, which produced ~1.15 million ounces of gold in Q3 2018 at some of the lowest costs in the industry ($785 AISC per ounce). This production and cash cost profile doesn't even include the assets that Randgold brought to the table - which consisted of two world-class Tier 1 gold mines (Kibali and Loulo-Gounkoto) that produce over 1 million ounces of gold per year at an AISC that is also in the first quartile of the industry cash cost curve.

(Source: Barrick Gold)

Loulu-Gounkoto will see steady production and cash costs over the next four years, as output will be around 700,000 ounces of gold per annum at an AISC of around $700-750 per ounce.

(Source: Randgold)

Kibali is also expected to have consistent production as it's finally fully ramped up. This mine's AISC should be in the $600-650 per ounce AISC range over the next four years as capex trends toward zero. Barrick owns 45% of Kibali, and the production estimates shown below are on a 100% basis.

(Source: Randgold)

The merger has created an industry-leading gold company that owns five of the top 10 Tier 1 assets in the world (Cortez, Goldstrike, Kibali, Loulo-Gounkoto and Pueblo Viejo) and two with the potential to achieve Tier One status (Goldrush/Fourmile and Turquoise Ridge).

It's no surprise that Barrick's stock price has been a leader over the last five months. This merger with Randgold puts the company in a very strong position, as net debt trends towards the zero line, and free cash flow is abundant, thanks to the stellar margins.

Technicals

That drop in GOLD in early January 2019 was simply a post-merger hangover, and the decline certainly wasn't a surprise to me; I expected the stock to sell off. But when it hit $11.78 in mid-January, it was time to buy.

(Source: StockCharts)

As I said then:

GOLD was finding support at the 200-day, which is a logical technical level that a low would form on the current chart. That level is now failing to hold, but I like the chances of a recovery, and the entry point is much better than it was months ago. It's time to take advantage of this sell-off, as I don't believe it will last. There are too many positives when it comes to GOLD.

GOLD has rebounded and is now approaching its December 2018 peak. Above that level and I like the chances for another strong surge to the upside in the stock.

We also have the 200-week at $13.71. This technical level has been clear support/resistance for many years (even as far back as 2010). GOLD needs to increase just 10 cents to surpass this mark.

(Source: StockCharts)

We have two important price levels to watch, and they are in the same vicinity. A 3% increase in GOLD clears both, which would be tough for the shorts to defend, and technical traders would be playing the breakout on the long side.

It's a nice setup, and the strong fundamentals will drive it home.

Disclosure: I am/we are long GOLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.