DieterMeyrl
DieterMeyrl
To say that I have been disappointed with Barrick Gold Corporation (NYSE:GOLD) stock performance is an understatement. I had anticipated higher price realization in underlying gold prices to lift GOLD's performance in my previous article. However, the market has not bought into my thesis, as GOLD continues to consolidate sideways.
Investors who have followed my thesis on SPDR® Gold Shares ETF (GLD) should be keenly aware that my bullish conviction on GLD has panned out since my initiation article in October 2023. I then followed up with a call to buy more GLD in January 2024, as I anticipate gold futures to break above their all-time highs. That thesis has also been delivered, as gold futures surged above the $2,200 level this week. Accordingly, the market has reacted positively to more dovish central bank expectations, spurred by Fed Chair Jerome Powell's constructive commentary and outlook.
Notwithstanding the optimism in GLD since October 2023, the underperformance in GOLD indicated a bifurcation in their market sentiments. However, that pessimism over gold miners like Barrick Gold is broad-based. Accordingly, the VanEck Gold Miners ETF (GDX) has underperformed GLD since May 2023, as buying sentiments have not percolated to gold miners. Should it be surprising? After all, shouldn't a leading gold miner like GOLD benefit from higher benchmark prices lifting their pricing assumptions in 2024?
It should. Based on Barrick Gold's outlook assumption for 2024 of $1,900/oz, we should expect Barrick Gold to outperform if gold prices continue to trend upwards. However, observant GOLD investors are likely cognizant that underlying prices are merely one of the critical factors determining the operating performance of Barrick Gold in the short- and medium-term.
Recall that Barrick Gold management underscored that GOLD's production outlook in 2024 is expected to be lower than expected. As a result, Barrick Gold anticipates a midpoint production output of 4.1M ounces. That guidance is markedly below its previous estimates of between 4.2M and 4.6M ounces. Moreover, Barrick Gold cited higher cost assumptions in 2024 "driven by lower output at the Nevada Gold Mines and Pueblo Viejo joint ventures with Newmont." Despite that, the company is confident it can achieve a "significant step down in costs expected from 2025, driven by increased efficiencies." In other words, Barrick Gold doesn't expect 2024's headwinds to persist, suggesting we can expect improved operating efficiencies from 2025, bolstered further by a more constructive gold price outlook.
Analysts' estimates suggest we should still expect Barrick Gold to generate double-digit growth in adjusted EPS through 2025. Given GOLD's relative pessimism, should buyers continue to capitalize on weakness and add more shares as the market remains tentative over its performance?
GOLD Quant Grades (Seeking Alpha)
As seen above, Seeking Alpha Quant has assigned GOLD a "C" valuation grade, suggesting a reasonable valuation assessment. GOLD's forward adjusted EBITDA multiple of 6.7x is in line with its 10Y average of 6.8x. Furthermore, GOLD's forward dividend yield of 2.7% should provide more robust valuation support for income-focused investors as the Fed looks to cut interest rates this year.
GOLD price chart (weekly, medium-term, adjusted for dividends) (TradingView)
In addition, I gleaned that the worst selling downside in GOLD seems to have waned as buying support has remained robust at GOLD's $13 level. However, GOLD remains in a consolidation zone with no clear uptrend bias, even though the worst seems over.
As a result, buyers who intend to add more exposure should be aware that momentum could remain tepid for some time. Therefore, buyers with a shorter-term horizon (less than one year) should abstain from buying GOLD.
Underlying gold futures have taken out their all-time highs, leaving even the stock of leading gold miners like Barrick Gold behind. As a result, investors need to be cautious about just looking at gold prices as the critical determinant of GOLD's buying sentiments.
The market is seemingly concerned with Barrick Gold's ability to lift production markedly in 2024, even as prices are expected to remain robust. As a result, the market has justifiably priced in higher execution risks as Barrick Gold attempts a faster production ramp to capitalize on potentially higher price realizations.
While I expect GOLD's sentiments to remain languid in the near term, I have confidence that long-term investors should find GOLD's valuation attractive, bolstered by more constructive earnings prospects in 2025.
Rating: Maintain Buy.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking. Note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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