Stock of the week - Barrick Gold (04.01.2024)

12:33 4 January 2024
  • Barrick Gold is one of world's leading gold producers
  • Company's stock is highly correlated with gold price
  • Barrick is looking to expand its copper output with potential M&A
  • Company approached First Quantum shareholders on potential takeover
  • First Quantum acquisition would triple Barrick's copper output
  • Stock looks undervalued compared to peers
  • Bears failed to push the stock below 200-session moving average

The final quarter of 2023 was a very good period for gold bulls, with the spot gold price jumping over 11% in the October-December 2023 period and finishing the year above $2,000 per ounce for the first time in history. This is good news for gold producing companies, like for example Barrick Gold (GOLD.US). Barrick made headlines this week on potential M&A actions. Let's take a look at the stock and recent news on it.

Stock is highly correlated with gold price

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Barrick Gold is one of the world's largest gold miners in terms of production. Company produced 4.14 million ounces of gold in 2022 (most recent full-year data), and trailed only Newmont Corporation, which produced 5.96 million ounces of gold. Gold sales accounted for around 90% of Barrick's revenue in recent quarters so it should not come as a surprise that company's stock is highly correlated with gold price moves. How strong is this correlation? Taking a look at correlation between daily price returns from Barrick Gold and gold spot over the past 5 years, correlation coefficient between the two is 0.72!

Given its high correlation with gold spot price, Barrick Gold stock can be used to get an indirect exposure to the gold market and can be a good portfolio diversification tool.

Source: Bloomberg Finance LP, XTB Research

Barrick looks to expand its copper production

Apart from gold mining, Barrick Gold is also involved in copper mining. It should not come as a surprise given that gold is usually mined along with base metals. However, copper accounts for less than 10% of the company's quarterly revenue. Nevertheless, this may be about to change.

Barrick Gold made headlines this week, when Bloomberg reported that it has approached major shareholders of First Quantum Minerals, Canadian mining company with significant exposure to copper, about a potential takeover. Share price of First Quantum Minerals dropped over 50% since late-October, when Panama Supreme Court ordered closure of First Quantum's mine in the country, which was the company's biggest asset. Such a sell-off made it a target for potential M&A action, and it looks like Barrick Gold is taking its shot.

Copper production accounted for around 10% of Barrick's revenue in recent quarters. Source: Bloomberg Finance LP, XTB Research

First Quantum acquisition would triple Barrick's gold production

Barrick Gold produced 112 million pounds of copper in Q3 2023, while First Quantum Minerals produced around 488 million pounds of copper in Q3 2023. However, copper mine in Panama that was shut down accounted for around half of the copper output. Having said that, First Quantum acquisition would triple Barrick's copper production. Should Barrick manage to use its expertise and experience to restart production at Panama mine, the boost to copper production would be even greater. As a result, Barrick's revenue stream would become more diverse, what is always beneficial and lowers the risk profile of the stock.

Barrick Gold looks undervalued compared to peers

As we have already mentioned, Barrick Gold is one of the world's leading gold miners. However, how company's valuation compares to its peers? Let's take a look! We have constructed a peer group consisting of 6 publicly traded gold mining stocks - Agnico Eagle Mines, Wheaton Precious Metals, Franco-Nevada Corporation, Newmont Corporation, Gold Fields Limited and Kinross Gold. We have taken a look at 6 different stock mulitples - P/E, P/BV, P/S, P/FCF, EV/Sales and EV/EBITDA.

Taking a look at the table below, we can see that multiples for Barrick Gold are lower than mean as well as median multiples calculated for the peer group, spare for mean P/FCF multiple. Valuations calculated with this means and medians suggest an upside potential for the Barrick Gold stock. Trimmed average of those valuations (excluding the lowest and the highest values) are 88.7% and 31.8% higher than yesterday's closing price for mean and median valuations, respectively.

Source: Bloomberg Finance LP, XTB Research

A look at Gordon Growth Model

As Barrick Gold is a dividend-paying company, its shares can be valued using the Gordon Growth Model. However, Barrick's dividends are volatile and the company did lower them in the past as well as had years when it did not pay them at all. An average dividend growth over the past decade is around 10%, but in order to account for the aforementioned volatility, we have decided to assume a 7% dividend growth rate in our model. We have based our 10% required rate of return assumption on the historical averages. Running the model with such set of assumptions provides us with intrinsic value per Barrick Gold share of $23.18, or over 30% above yesterday's close.

Source: Bloomberg Finance LP, XTB Research

A look at the chart

Taking a look at Barrick Gold chart (GOLD.US) at D1 interval, we can see that Bloomberg report on First Quantum M&A talks triggered an around-3% drop in the company's share price. However, daily low was painted almost exactly at the 200-session moving average (purple line) and the stock bounced off this technical hurdle later on. The ongoing pullback looks like a correction so far, as the stock did not break below the upward trendline, previous local low or the lower limit of the local market geometry. A drop below $16.40, or around 5% from yesterday's closing price, would be a reason for concern, but until that happens, the technical landscape continues to favor bulls. Should we see buyers regain control and push the stock higher, the near-term resistance levels to watch can be found in the $17.75 and $18.50 areas.

Source: xStation5

This content has been created by XTB S.A. This service is provided by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. XTB S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.

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