Barrick Gold: Significant Tailwinds And Undervalued Stock
Summary
- Gold prices are expected to go up as inflation pushes commodity markets upwards.
- Copper demand will increase significantly in upcoming years.
- Barrick Gold's stock is largely undervalued compared to its peers.
Barrick Gold (NYSE:GOLD) can benefit largely from gold (GLD) and copper (CPER) price appreciations. The business faced certain headwinds in recent months which pushed the stock price downwards. However, we consider that these headwinds as short term and expect the stock to appreciate considerably.
Gold and copper markets are great investment targets in current macro environment. Inflation expectations are quite high which push commodity prices higher. Recent PCE report showed that the index rose 0.5% MoM because of huge increase in personal incomes. Personal income rose 21.1% MoM - it is the biggest rise since 1946. The big jump comes from direct payments to Americans under the American Rescue Plan Act. Due to the inflationary pressures, largest companies are announcing price increases for their products: Procter & Gamble (PG) announced that they are going to increase prices in September at a high-single-digit rate, Coca-Cola (KO) management said that they feel pressure from input prices, Steel Dynamics (STLD) announced that input prices are significantly high, etc. 5-year inflation expectations are currently at a 10-year high level of 2.54%. The index represents the difference between 5-year treasury yields and 5-year TIPS.
Despite these considerable inflationary pressures, the Federal Reserve is keeping interest rates low. During the recent meeting, the Fed continued its dovish stance and didn't show any intention to hike rates. So, as long as real interest rates stay negative, gold prices are expected to rise.
All these developments indicate that inflation can be considerably higher than current expectations. So these drivers push gold prices higher as the metal price rose almost 25% in 2020. Goldman Sachs expects the trend to continue and has a $2,000 gold price target over the course of the next six months.
Copper price has also been rising in recent quarters and Goldman Sachs has a very positive outlook on the metal. It expects more than 600% demand growth in upcoming decade due to electric vehicles. We have discussed the copper industry outlook deeper in our article about Freeport-McMoRan (FCX). So we should note that Goldman expects $11,000 price for copper, which is 10% higher than the current price.
During recent months, Barrick Gold witnessed lots of short-term headwinds which pushed the stock price lower. The company reported a preliminary Q1 2021 report where production and sales volumes were lower compared to Q1 2020 results. The company reported production of 1.1 million ounces of gold and 93 million pounds of copper, while a year ago Barrick produced 1.3 million ounces of gold and 115 million pounds of copper. The main reasons for this decline are mine sequencing at Carlin and Cortez mines and lower grades at Pueblo Viejo. At the same time, the company faced another problem in Papua New Guinea. Porgera gold mine was on care and maintenance since April 2020 as the government prohibited mine operations due to environmental issues. However, the company managed to reach to an agreement with the PNG government to continue mine operations. According to the new agreement, the government's share increased to 51%.
The management estimated that Q1 production decline will not hinder the company to record production numbers in line with initial forecasts for the whole year as they expect H2 2021 production to be considerably higher than H1 results. At the same time, in long run, the management expects quite stable gold production until 2030 which means that top line numbers generally depend on gold prices.
However, the company intends to increase its copper production in upcoming years. The biggest driver for this increase will be Lumwana mine, which is located in Zambia and is 100% owned by the company.
Threats
Due to its geographic diversification, the company bears lots of political risks. Barrick operates in lots of countries which have rather unpredictable political systems and cause uncertainties for investors. One of these examples is the recent event concerning the Porgera gold mine. Due to the issue, the mine is not operating since April 2020.
At the same time, the business is largely dependent on market risks. Gold and copper price fluctuations can cause tremendous problems for the company during economic downturns. The cost structure of the company is not that agile to compensate top line decreases, that is why negative market developments can harm the business significantly.
Valuation
Looking at current multiples, we can notice that the stock is quite conservatively valued. The stock trades near its 5-year median multiples, as EV/EBITDA is only 6.2 and EV/Sales is at 3.7. These multiples don't correspond to the current bullish commodity environment and we think that the stock deserves to trade at higher multiples than historical averages.
Meanwhile, the stock is currently trading at lower multiples compared to its 5-year median P/B and P/CFO ratios.
We have also created a relative valuation analysis model to compare Barrick's stock multiples with peers' multiples. As a result, we see that the company is trading at a considerable discount compared to its peers. Our model yields an intrinsic value of $31.8 which is 49% higher than current market price. As a more conservative value, we can adopt 1st Quartile value of $26.5 which is 25% higher than the current price. So the relative valuation analysis indicates that the market is positioned quite conservatively. We consider current undervaluation unjustified and expect stock price to go up in upcoming quarters.
Source: Author's Spreadsheet
Conclusion
Barrick Gold produces gold and copper. We think that these commodities will increase in value considerably in upcoming quarters bringing significant tailwinds for the business. However, due to certain minor short-term headwinds, the stock is currently undervalued that is why we will assign a Buy rating to the stock with a price target of $26.5.
This article was written by
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