Barrick Gold Stock: Significant Upside Potential at Current Price (ABX:CA) (GOLD)

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Investment thesis: The market still operates on the same playbook that has been used over and over again over the past decades when it comes to the relationship between gold and interest. rates. It is believed that when interest rates rise, gold tends to fall, for valid fundamental reasons. This is why Barrick Gold (NYSE: GOLD) the stock is now trading at half the price it traded at during its high point this decade. It is assumed that higher interest rates tend to make gold less attractive to own relative to other assets. Paper assets such as bonds, for example, start earning more, while gold earns nothing. The US dollar tends to outperform other fiat currencies in these times, which is considered negative for gold. This assumption is fundamentally flawed because what makes this current economic turbulence different from what we have seen in previous decades is the fact that we are heading into a stagflationary environment that is expected to last for a very long time. A rise in interest rates will likely lead to an increasing trend of defaults, which could potentially weaken the global fiat-based financial system. Despite higher interest rates, this will turn into a net positive for gold prices as investors seek safety. Barrick Gold stands to benefit as it is already a profitable gold producer with large reserves that can sustain production at current levels for the foreseeable future.

Barrick is among the most profitable gold producers.

All inclusive costs of gold mining by various companies

All-inclusive costs of gold mining by various producers (The money represents it)

As we can see, Barrick is at the bottom of the cost table when it comes to overall costs. At a production cost of $1,000/oz, we can assume that it is immune to any short-term drop in the price of gold from current levels. In other words, its production price is more competitive than many industry peers, so it is unlikely to be among the first to cut mining if it comes in the worst case. .

For the first quarter of the year, Barrick recorded a decline in revenue of almost 4% compared to the same quarter of the previous year. Revenue was $2.85 billion and net profit was $438 million. So the profit margin was just over 15%, which is pretty healthy. The decline in revenue is partly explained by a decrease in gold production of about 10% compared to the same period last year.

Whatever happens to gold prices is what will happen to Barrick shares in the future.

With respect to the future financial outlook, Barrick’s outlook is deeply tied to the outlook for the price of gold and, to a much lesser extent, the price of copper.

Barrick's Cumulative Gold Cash Flow Forecast 2022-2026 Based on Gold Prices

Barrick Gold

As we can see, Barrick’s free cash flow expectations are positive with gold prices as low as $1,200/oz, and they double if prices hit $2,000/oz. Personally, I think gold prices will start to rise significantly next year, and the average price by 2026 will be well over $2,000 an ounce. Barrick shares are expected to rise accordingly as rising gold prices will exponentially impact profitability, free cash flow, debt reduction, dividends and other aspects of Barrick’s financial particulars. .

Rising interest rates can be detrimental to the global fiat financial system, as well as having a negative impact on the financial performance of most companies, leading investors to turn to gold as a safe haven. As I pointed out in a recent article, the current upward trend in interest rates has the potential, in conjunction with persistently high rates of inflation, to derail the global fiat financial system. In short, the global debt-to-GDP ratio is about two and a half times higher than it was in the early 1980s.

total global debt to gdp

IMF

We have managed to increase our debt capacity as a percentage of GDP thanks to a steady decline in interest rates over the past four decades. As interest rates now rise, our debt capacity is set to decline. By the way, given the recent Q2 GDP figures, showing an official recession, some investors assume that interest rates will stop rising. I’m personally skeptical of the viability of this argument, even though that’s usually what happens in an economic downturn.

The reason interest rates aren’t about to return to a long-term downtrend is that inflation isn’t likely to either. Some temporary relief from inflation growth may occur, when oil and gas prices decline, along with prices of other commodities. An economic slowdown, partly triggered by rising interest rates, could help in this regard. On the other side of the equation, we have a serious case of raw material shortages, which, although there will be some demand destruction in the future, will not be enough to alleviate the problem in the long term. of rarity. Additionally, we have the rising tide of global geopolitical friction increasingly disrupting global supply chains. All of this is synonymous with global scarcity, hence inflation, combined with low rates of economic growth. These factors together amount to stagflation for the foreseeable future.

Governments will be tempted to fight weak economic growth by spending more. So even though interest rates may rise, central banks around the world will continue to maintain a broad balance sheet policy. The ECB’s policy of continued support for heavily indebted sovereigns such as Italy, even as it tentatively began raising rates, pretty much sums up the overall fiscal and monetary trajectory for much of the developed world. Another developing trend is a new round of bailouts. EU energy companies are being nationalized, and the petrochemical, steel and other industries are likely to follow perhaps as early as next winter. All of this means higher deficits as the EU economy in particular will have to nationalize the growing losses of the private sector in order to prevent them from collapsing completely. Of course, this is only a temporary solution, intended to transfer ongoing debts and losses to the entity that has the most capacity to support increasing debt loads. At some point this too will stop working, and that is when we will likely start to see some serious cracks emerging in the global fiat financial system.

It may be some time before the damage to the system becomes more evident, at which time investors are likely to find renewed interest in increasing their gold holdings as protection against a fiduciary calamity, even if interest rates continue to persist at higher levels. Until then, it will be tough for gold prices perhaps a little longer. We might even see it break below $1,700 an ounce very briefly, maybe this year or next.

Investment implications.

As the market pushes gold prices lower, based on running the same playbooks we’ve been used to in past business cycles, I dare say this time is really different. It is very obviously different when the US Federal Reserve raises interest rates in a recession whereas at this stage, when an official recession is confirmed, it tends to switch to monetary easing mode. The global supply situation is such that a stagnant economy, along with higher interest rates, will have a rather limited effect on inflation. Central banks are stuck in an impossible situation, where any monetary easing will lead to inflation as more money will drive out scarce commodities while rising interest rates will likely cause significant difficulties for the global fiat system. Either way, this is a positive situation for gold.

Barrick is a profitable gold producer. While gold doesn’t pay dividends, Barrick as a gold miner does, which makes for a nice bonus, on top of what I see as a pretty positive outlook for its stock price.

Barrick Basic Dividend and Shareholder Return

Barrick Gold

Gold production is expected to be more or less stable, even in assumed gold and copper prices that are well below current levels, based on Barrick’s own forecast.

Barrick Gold production until 2031

barrick

Given the long-term production outlook, which appears stable, the main question regarding the direction of Barrick stock is primarily related to the long-term outlook for gold prices. In this regard, as I pointed out in a recent post, in my view, the long-term support level is based on the price needs of miners to produce those marginal ounces. I see this price level as somewhere in the $1,500/ounce range, which is a floor price that can be exceeded by the market, but only for a limited period of time.

The upside potential for gold prices is virtually unlimited. Against this backdrop, Barrick stock at current levels presents an investment opportunity with somewhat limited downside risk, while it is unclear how far it may go, in correlation with gold prices. If I’m right about the bleak outlook for the global fiat-based financial system, which will consequently be reflected in a flight to the safety offered by gold, Barrick stock is currently a bargain not to be missed as a long-term investment opportunity. in my opinion. I recently bought other stocks. If the price of gold drops below $1,700, causing Barrick shares to fall further, I am ready to add more to my already existing position.

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