Barrick Gold Shares: Numerous Positive Catalysts (TSX:ABX:CA)

my thesis

After publishing an optimistic thesis about Barrick Gold (NYSE: GOLD) on June 4, the stock returned investors 17.3% in share price and dividend growth. The thesis proved to be correct, because the stock significantly outperformed the S&P 500 over the same period.

The stock price has demonstrated a strong correlation with gold prices over the past twelve months. According to several prominent investment banks, gold prices are expected to remain strong in the coming year. The bullish outlook for gold prices is reasonable with all the political uncertainty around the world. Based on the valuation ratios and the DDM approach, it looks like Barrick stock is worth a lot more than it’s currently selling for. The profitability profile is steadily improving, which underlines the fundamental strength of the company. Therefore, I think GOLD is still a Strong Buy.

GOLD stock analysis

Barrick Gold’s profitability profile continues to steadily improve, which is a strong bullish sign. TTM operating margin reached 27.4%, which is considerably higher than twelve months ago. In addition, free cash flow is improving. This expansion increases the company’s financial flexibility. The upward trend of key financial parameters underlines a positive outlook. It reinforces an optimistic outlook on the company’s future growth and stability.

The company is doing well in the current precious metals market. Gold prices are rising. The price of gold has increased by 31.1% in the past year. In the last five years, it has increased by 67.6%. This trend is good for the company and the outlook for gold prices remains bullish. For example, Citi says gold prices will likely reach $3,000 an ounce in the last twelve months. Compared to current gold price levels, there is a 20% upside potential. Analysts at UBS and Goldman Sachs are also bullish on gold prices.

Gold prices started to rise in 2022 after Russia’s invasion of Ukraine began. The geopolitical situation in the world has become even more uncertain since 2022. There are no signs that relations between the US and China are improving. If Donald Trump returns to the White House, relations are likely to become even more strained. It was Mr. Trump who started the “trade war” with China.

There are several other big geopolitical concerns. The situation in the Middle East is tense. China-Taiwan relations also pose a great geopolitical risk to the modern world, and potential military escalation here is also not an impossible scenario. Therefore, the bullish outlook for gold appears to be reasonable.

Over the past twelve months, the price of gold and shares of Barrick Gold have demonstrated a strong correlation. Therefore, it is reasonable to expect that if gold continues to rise to $3,000 an ounce, Barrick’s share price may also provide comparable share price growth over the next twelve months. The stock also recently received a rating upgrade to Buy from Argus Research.

Last but not least, let’s not forget how crucial momentum is to any stock. According to Seeking Alpha’s GOLD “Momentum” tab, the stock is experiencing a strong bull run. Strong momentum is always a robust tailwind for any stock, especially when backed by strong fundamentals and favorable industry trends.

Intrinsic value calculation

As I described in my first thesis about GOLD, the company’s close peer is Newmont Corporation (NEM). Therefore, looking at the values ​​of these two companies is a good start to understand the attractiveness of the GOLD valuation. Despite being a much more profitable company with a significantly healthier financial position, GOLD is cheaper when comparing valuation ratios. The table below suggests that none of GOLD’s valuation rates are higher than NEM’s. Hence, the stock looks attractively valued based on peer review.

Discounting future dividends is another good way to understand valuation attractiveness. The intrinsic value of the shares will be calculated using the dividend discount model (DDM). The discount rate for this approach is the cost of equity, and its calculation is shown below.

The cost of equity is 6.7% and I will deduct the expected growth rate from this in my DDM formula. GOLD’s dividend CAGR over the past five years is 17.32%, which is substantially higher than the discount rate, and that makes the DDM approach irrelevant. Therefore, I need to implement a more conservative dividend growth assumption, and the sector median of 5.8% CAGR over the past decade seems appropriate. According to the dividend dashboard, the expected annual payout is $0.4.

The upside potential is 128% given that the stock’s estimated intrinsic value is $44.4. Given solid fundamentals, a potential upside of 128% is massive.

What can go wrong with my thesis?

DDM is highly sensitive to changes in assumptions about the expected growth rate. For example, implementing a 5% dividend growth rate drops the intrinsic value per share to $23.5. This is almost twice as small as we calculated in the scenario above. Therefore, any adverse news related to dividend payments could significantly undermine investor confidence in the stock.

Gold mining companies often expand their portfolios through multi-billion dollar acquisitions. Such large transactions are inherently risky, exposing companies to various legal and regulatory challenges. In addition, acquisition costs are based on long-term forecasts and numerous assumptions, which may turn out to be overly optimistic. Consequently, there is an increased risk of GOLD overpaying for a potential acquisition, which would not be beneficial to shareholders.

As previously mentioned, gold is considered a defensive asset, with demand typically increasing during periods of uncertainty. Currently, ongoing wars have significantly complicated the global geopolitical landscape. However, history indicates that all conflicts eventually end in peace. While I am not an expert in politics or military affairs, my assessment that these wars are unlikely to end anytime soon may be incorrect. I believe that a reduction in geopolitical tensions could substantially decrease the demand for gold, which would counter my thesis.

Summary

GOLD’s improving profitability underscores the company’s fundamental strength. The strong near-term outlook for gold prices is a strong bullish catalyst for GOLD. The stock has demonstrated an almost perfect correlation with gold prices over the past twelve months, which supports my bullish stance. Valuation analysis suggests that there is still vast potential for growth.