Barrick Gold Stock Analysis: Buy Barrick Gold Before Gold Goes Up? High Dividend Yield Potential

Hey, welcome back! Since it’s been a while since I last covered
Barrick and the quality of the previous video is not as good as I want it to be, I’ve
decided to make a new video about them and see if there’s anything new in the investment
thesis. Since making that video some months ago, I
bought quite a bit of Barrick stocks and I am enjoying a pretty good profit with most
of the positions.

In 2022, the price of gold was quite volatile,
going from almost $2,000 per ounce in March to $1,600 in October and above $1,800 in December. Barrick, like every other gold miner, is inherently
tied to the price of gold. We can see that Barrick had a very similar
price movement, with the stock being above $25 in April, $14 in October and $17 in December. Barrick is the second largest gold miner on
the planet, with an annual production of around 4.5 million ounces of gold and around 500
million pounds of copper. They expect to have a relatively stable production
of gold and copper in the next decade, and this type of predictability is a big plus
in this industry. They are also developing their copper production,
which should be great for the free cash flow overall, since gold and copper tend to have
an opposite role in a portfolio. That is because gold is seen as a defensive
commodity, while copper is a very bullish one which also has a lot of potential in the
future thanks to things like electric vehicles and green energy, as I covered in a previous
video. Of course, like every other miner, they are
also investing in exploration to increase the long-term reserves, which so far is going
fine.

Plus, they have some of the best quality mines
on the planet, including 6 Tier One gold mines, which is another positive thing and ultimately
a competitive advantage. As for the free cash flow, they produced only
$1.2 billion in the past 12 months because of higher capital expenditures due to some
expansions and special maintenance required. Those however won’t happen every year, but
they have to be done from time to time. Similar to Newmont, Barrick has also provided
a guidance based on the price of gold and copper. This is a sum for the next 5 years, so we
have to divide everything by 5. We can see how much the price of gold can
impact this number, with Barrick expecting to make $1.2 billion when the price is around
$1,300 per ounce, and around $4 billion when gold is at $2,000 per ounce.

Overall, each $100 for an ounce of gold should
represent around $300 million for Barrick’s free cash flow. Similarly, every 50 cents for a pound of copper
should mean around $160 million. This information, together with Barrick’s
production outlook, are going to be key a bit later in the valuation. The company has an all-in sustaining cost
of around $1,215 per ounce of gold and $2.96 for a pound of copper. Those two have increased a lot in the past
couple of years, due to inflation. We have to keep inflation in mind when looking
at commodities, because it can affect the bottom prices quite a bit. If every miner has a production cost that’s
let’s say 10% higher than last year, then the price of gold would have to fall less
to affect those companies. If the top half of mines was producing gold
below $1,050 per ounce 1 year ago, that level is probably closer to $1,100 today, which
is a big deal. Going into Barrick’s debt, we can see that
they have a negative net debt position, or a net cash position, meaning that they have
more cash than their total debt.

To be more precise, they have $5.24 billion
worth of cash and cash equivalents and around $5.1 billion worth of debt. The company has a dividend policy that is
based on the net cash position. On top of a 10-cent base dividend for each
quarter, they can also pay between 5 to 15 cents per share, which would bring the maximum
annual dividend to a dollar.

However, if everything goes very well or something
special happens, they can always distribute a special dividend, as they did in 2021. At the current price, if things maintain around
this level, they could easily pay a dividend of around 4%. They also have an ongoing $1 billion share
buyback program used to take advantage of opportunities, and we can see that they are
indeed quite smart with those purchases. Most of the money has been spent in Q2 and
Q3 2022, when the stock was at very good prices. Right now, around a third of that $1 billion
has been spent, so there is a lot more to go. Now for a valuation, this is going to be all
about the price of gold and copper. Since we know that the production should be
relatively stable, we shouldn’t have an issue from that side for at least a decade. I am going to go through a few different scenarios
that we can expect, and see how the current price of almost $17 – which implies a market
cap of $30 billion – would relate. If gold is at $1,200, then Barrick is not
making any money and they can have some issues, which would be reflected in the stock price.

Sure, we need to keep in mind that they have
some mines that have an all-in sustaining cost that’s in the hundreds and if they
need to, they can lower or even stop the production in the mines that are more expensive to run. In such a scenario, Barrick’s financials
offer a very important advantage. Other companies can’t just cut the production
and would be in a terrible spot if they have to pay the debt. In this case, Barrick can buy such companies
in distress at a good price and boost their long-term production. In this scenario, they would probably have
to cut the dividend and the stock price could fall a lot, probably around $10 per share
or even less.

Such a scenario can happen, but it probably
wouldn’t last for too long. Commodity prices are all about supply and
demand. With gold at $1,200 per ounce, we are looking
at around 65% of the potential production, which could lead to a supply gap that would
boost the price. I explained this commodity cycle in more detail
in the video I made about copper and copper miners, but the main idea is the same for
gold as well. If gold is at $1,700 per ounce and copper
is at $4 per pound, Barrick should make around $2.8 billion in free cash flow per year.

For a market cap of $30 billion, that’s
a price to free cash flow ratio of around 11, which is pretty low for such a financially
healthy company. If they pay a dividend of around $0.6 per
share, that’s a yield of 3.5% for a price of $17. However, buying this at a lower price like
$14 as I did, would imply a 4.3% dividend, which is even better. I would expect the price to free cash flow
ratio to be around 15 to 20 for Barrick in the long-term, which would imply a stock price
of $23 to $31 and a gain of 30% to 80% from the current price.

With gold at $2,000 per ounce and copper at
$4.75, Barrick could make as much as $4 billion per year. Currently, this would put the price to free
cash flow ratio at only 7.5, which would realistically be almost impossible to see in such a scenario. In this case, they could most likely afford
paying the maximum dividend, which would be $1 per share. For a price of $17, that’s a dividend of
5.88% per year. Getting this to a price to free cash flow
ratio of 15 would imply a stock price of $34 and a gain of 100%, while a ratio of 20 would
come with a stock price of around $45, for a gain of almost 170%. Now, in case we see gold at something like
$2,500 per ounce and copper at $6, we are looking at a massive potential for Barrick. Yes, I know that those prices may not be the
most realistic, but the past couple of years have proven that we can never know what can
happen.

In such a scenario, Barrick would produce
around $5 billion in free cash flow per year, which would put them at a price to free cash
flow ratio of only 6 today. In this case, they would most likely be able
to pay even a special dividend, which could bring the yield to something like 8% for the
current price. Buying this at a price of around $13 or less
could imply a dividend yield of over 10%. Now, if the market was trading it at a price
to free cash flow ratio of 15, that’s a price of $42.5, for a gain of 150%.

If the ratio is at 20, that’s a stock price
of $56.6, for a gain of 233%. Overall, all of those scenarios can happen
in the next 5 years, but let’s assume a 10% probability for scenarios 1 and 4, 60%
for 2 and 20% for 3. In that case, we are looking at an average
price for Barrick of $25.85 to $34.26. That is a gain of 52% to 101% in 5 years. That would be a gain of 10.4% to 20.2% per
year, which is definitely not something to ignore. I say 5 years, but any of those scenarios
can happen even in the next 5 months. Also, some may never happen or we may be stuck
in one of those scenarios for a decade or more, but we can’t predict it. Also, what if gold goes to $3,000, or $5,000
per ounce or even more? In that case, we are looking at a potential
ten-bagger, or probably more. And yes, this would happen to pretty much
every gold miner out there, but I want to invest in one which I know is able to be fine
in every scenario, not just in the good ones.

Barrick has great financials and should offer
really nice dividends when the price of gold is high, and decent ones when the price is
around $1,600 per ounce. The production is pretty stable, the risk
of the business going bankrupt is close to 0, and even if gold goes nowhere in the next
decade – which is very hard to imagine due to inflation – Barrick should still be a good
investment for me. If I can buy Barrick at something like $10
per share, that would be a dividend of 10% when the price of gold is high. Plus, there is almost no way that that market
would keep the stock at $10 if the price of gold is high enough to lead to that dividend.

Overall, the risk is limited, while the reward
can be almost unlimited. I kept buying Barrick in the past couple of
years, and I will probably keep doing it when the price is at or below $15. That’s because I have enough exposure for
now, but a price below that level would imply a very nice potential return and dividend. If gold is doing well and I need money to
invest in something, I can trim the position or use the high dividends that they would
pay in such a scenario. If the price of gold is down, I can use the
dividends from the companies that do well in such times and also probably buy more Barrick
at a good price. Either way, Barrick, among other companies,
is providing a nice hedge to my portfolio. As always, what I cover in my videos shouldn’t
be enough for you to make an investment decision and we are very likely to have different goals
and a different risk tolerance, so please do your own research. That’s all for this video, don’t forget
to like, comment and subscribe if you enjoyed it.

Thank you for watching and I’ll see you
next time..

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