Barrick Gold Looks Undervalued Despite 70% Recovery

by Trefis Team
Barrick Gold
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Despite an impressive 70% rise since the March 13 lows of this year, at the current price of around $27 per share, we believe Barrick Gold stock (NYSE: GOLD) has more upside left. GOLD’s stock has increased from $16 to $27 off the recent bottom, much higher than the S&P which increased by about 40%. The stock has been able to outperform the broader market over the last 4 months due to a sharp rise in gold prices during the current pandemic, which benefited Barrick Gold as 94% of its revenue comes from the yellow metal.

The stock currently is 86% above the levels at which it was at the end of 2017 and it has already surpassed the pre-Covid (February 2020) high of $22. Despite such a healthy rise, we believe that the company’s stock still has a modest upside of around 10%, driven by the outlook for gold prices to remain at elevated levels while copper prices are likely to rebound post the current crisis. Our dashboard What Factors Drove 86% Change In Barrick Gold Stock Between 2017 And Now? has the underlying numbers.

Some of the stock price rise during the 2017-2019 period is justified by the 16% growth in revenues. Barrick Gold revenues increased from $8.4 billion in 2017 to $9.7 billion in 2019, with all the increase coming in 2019, mainly driven by the acquisition of Randgold Resources. This was offset by a 10.7% decrease in profitability as net income margin declined from 10.5% in 2017 to 9.3% in 2019. This decline was mainly because of margins dropping significantly in 2018 on the back of a decline in revenues, lower grade ores and impairment charges. Margins recovered in 2019 but stayed slightly shy of the 2017 level. On a per share basis, adjusted earnings decreased from $0.75 in 2017 to $0.51 in 2019.

The stock price increased during this period, and mainly in 2019, as margins and revenue grew and other factors like the rise in global gold prices and formation of the Nevada JV with Newmont. This rise led to an increase in P/E multiple from 19x in 2017 to 37x in 2019. The multiple shot up further this year and currently stands at 53x, as the stock price increased with the further rise in gold prices during the pandemic. We believe the P/E multiple could go further in the near term driven by expectations of higher revenue due to rising shipments and cost efficiencies due to the Nevada JV and higher grade ores, thus providing an upside to the stock.

What’s The Likely Trigger & Timing For Further Upside?

A slowdown in economic and industrial activities and expectations of a global recession, following the outbreak of coronavirus this year, has increased gold’s value as a hedging instrument. Global gold prices have increased from about $1,500/ounce at the beginning of 2020 to over $1,800/ounce currently due to higher demand. With rising investment in the yellow metal by major central banks and expectations of interest rates heading south, gold prices already saw a sharp rise in 2019. This trend was further boosted by the current Covid-19 crisis. This was reflected in the company’s Q1 2020 results which saw Barrick Gold’s revenues rise by 30%.

Over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. compared to the rate seen in April-May to boost market expectations. Additionally, the gradual lifting of lock downs is also giving investors confidence that developed markets have put the worst of the pandemic behind them. Following the Fed stimulus — which helped set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results.

The gradual lifting of lockdowns and easing of global supply bottlenecks is likely to help a large company like Barrick Gold which operates across continents and has a global supply chain. This is projected to lead to higher shipments post the crisis. Though gold prices could drop marginally post-Covid, a subdued economic growth outlook could avoid any significant drop in gold price, while copper prices are likely to rebound once demand starts picking up post-Covid. Higher shipments could offset a slight drop in gold price realization. Thus, rising revenue and margins during the current crisis in 2020 when most industries are adversely affected, followed by expectations of continued healthy growth in 2021 due to the Nevada JV and higher production, and with investors’ focus shifting to 2021 numbers, we believe Barrick Gold’s stock is set to see further upside of about 10% from its current level of $27. As per Barrick Gold valuation by Trefis, we have a price estimate of $30 per share for GOLD’s stock.

While GOLD’s stock has performed very well during this crisis and is set to rise further, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

For further insight into the gold mining space, see how Barrick Gold’s rivals Newmont and Freeport-McMoRan compare with each other.


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