Company Note: Barrick Gold (Gold), Strong Buy
Recommended soundtrack: Hotel California, Eagles
Company: Barrick Gold Corporation (GOLD)
Position: 15 percent of Leveraged Gold Position
Recommendation: Strong Buy
Purchased price: $17.09
Target Price: $30 (75% upside)
Investment Thesis:
Barrick Gold represents a tremendously undervalued opportunity to gain highly leveraged exposure to higher gold prices through its massive reserve base. With gold reserves alone worth over $151 billion at current prices, Barrick's $30 billion market cap prices in minimal value for these assets. As the gold bull market continues gaining momentum, Barrick is positioned for outsized returns.
For investors holding physical gold as a base currency rather than U.S. dollars, we recommend leveraging up to 15% of their gold holdings to purchase shares of Barrick. Borrowing at 2% against this allocated gold position provides a way to amplify gold exposure through Barrick's equity at very attractive financing rates.
Barrick Gold Upside Drivers:
1) Undervalued Asset Base
2) Proven and probable gold reserves of 64.4M oz valued at $151B at $2,346/oz
3) Measured & indicated gold resources worth an additional $227B
4) Copper reserves and resources provide $76B in supplemental value
5) Total $526B in reserve/resource value utterly dwarfs $30B market cap
Operating Leverage to Higher Gold Prices
1) All-in sustaining costs of just $765-$815/oz leave ample leverage to rising prices
2) 10% increase in gold prices flows through to 35%+ increase in earnings
3) Reserves/resources rise further in value, expanding equity valuations
4) Robust Growth Pipeline
5) Development projects like Goldrush and Cortez Deep South to add 1M+ oz/year
6) Ability to quickly reactivate Pascua-Lama's 21M oz if economics improve
7) Tight Capital Allocation
8) Stringent capital prioritization focused on maximizing free cash flow per share
9) Targeting further debt reduction to $5B by year-end increases equity upside
10) Surplus cash flows can support increased dividends/buybacks
Risks:
Execution challenges ramping up new developments, regulatory/political risks in mining jurisdictions, higher costs from inflation, labor or social pressures.
Valuation:
With 964M fully diluted shares outstanding, Barrick trades for just $31/reserve oz of gold and $3.50/total measured & indicated resource oz. This values just a fraction of its reserves/resources and provides substantial upside as the gold bull market progresses.
My $30 price target applies just a 0.5x multiple to Barrick's reserves/resources at $2,346 gold, suggesting 75% upside potential. I see further upside as gold likely moves higher over the next few years.
Investment Strategy for Gold Holders
For investors holding physical gold, I recommend leveraging up to 15% of those gold holdings to raise capital and purchase Barrick shares.
Borrow at 2% rates against this allocated gold to effectively leverage your gold exposure through Barrick's equities. This capital markets "play" on gold via Barrick's stocks is likely to vastly outperform gold itself and the broader equity markets over the next 5 years.
Barrick provides a way to amplify your gold holdings on an advantageous leveraged basis. As a portfolio holding, size the leveraged Barrick position between 10-15% of total portfolio gold value for optimal risk/return.
