Is This the Best Gold Stock?

Gold prices are up almost 14% year-to-date.

So, why is Barrick Gold (GOLD) down 3.5% over the same period?

This question is plaguing financial pros, who acvtievly searched for answers this past month, making it the top gold stock search amongst money managers according to our TrackStar data.

And it turns out we may have uncovered a unique, and potentially profitable situation.

Barrick Gold’s Business

Since 1983, this Canadian multinational has grown to become one of the largest gold miners in the world, operating across 13 countries. 

Barrick Gold manages mining assets, including six Tier One gold mines and several high-potential copper projects. 

Source: Barrick May 2024 Investor Presentation

So, what’s causing the underperformance?

Take a look a the following chart:

Source: Barrick Q1 Investor Presentation

Barrick produced less gold at a higher cost. It’s as simple as that.

However, the drop in production and increase in costs were expected and in line with management’s expectations.

They have been quietly beefing up its reserves, replacing what it digs out year after year without resorting to pricey acquisitions. 

With projects like Reko Diq and Fourmile waiting in the wings, Barrick’s gold is looking to add 12.5 million ounces to its reserves, or an increase of 16%. 

Meanwhile, its copper production is poised to double by 2029, riding the wave of green energy demand. 

So, really, the latest underperformance is a matter of unfortunate timing rather than a sign of a poor business.
Financials

Source: Stock Analysis

Barrick hasn’t been without its share of problems.

Revenues have stagnated since 2020, when they got a lift from surging gold prices.

Gross margins have held largely flat, while free cash flow margin has fallen markedly since its peak in 2020.

Despite the variability in margins, cash flow remains stable, allowing the company to pay its 2.3% dividend yield comfortably.

Plus, it carriers very little debt, which it has continued to reduce over the years.

Valuation

Source: Seeking Alpha

Barrick is probably the most conservative play amongst gold miners.

It trades at just 15x forward earnings, making it the second cheapest to B2G Gold (BTG). The sane golds true on price-to-cash flow.

At 1.3x, its also the cheapest in terms of price-to-book value, which is largely made up of the company’s gold mines.

Growth

Source: Seeking Alpha

While cheap, Barrick has not posted the same revenue growth as its peers over the past 3-5 years. 

It’s only looking forward that it finally breaking above the double-digit level, putting it in line with Newmont Mining (NEM) and the rest, but still in last place.

Profitability

Source: Seeking Alpha

Interestingly, B2G and Agnico-Eagle Mining (AEM) run significantly higher gross margins than the rest. However, that doesn’t always translate to higher net income or free cash flow.

In fact, Barrick’s net income margin trounces all its peers, indicating its long-term profitability focus.

Our Opinion 6/10

While everything looks good on paper, Barrick’s inability to drive higher revenues and production along with better cash flows is concerning.

We can’t determine whether their current efforts to rebuild reserves will deliver better returns down the road.

However, we feel owning gold directly through an ETF is a better way to play the price of the yellow metal than through this miner.

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