Barrick Gold: Don't Give Up Now As It Nears Peak Pessimism

mikulas1

Thesis

We highlighted in our previous article on Barrick Gold Corporation (NYSE:GOLD) (TSX:ABX:CA) stock in June urging caution (Hold rating), as it was still too early to be bullish. Therefore, we are not surprised that GOLD has continued to exhibit significant downside volatility, as it underperformed the SPDR S&P 500 ETF (SPY) even as the broad market bottomed.

However, GOLD didn’t follow through with its initial July rally, as the market sent it spiraling down in August, with sentiments worsened by Fed Chair Powell’s hawkish address at Jackson Hole last week.

However, we noted that there’s cause for optimism, as we believe GOLD’s valuations have been de-risked, despite the market’s pessimism over interest rates and a robust dollar index.

Notwithstanding, we have yet to glean a bear trap price action (indicating the market denied further selling downside decisively) in GOLD’s long-term chart. However, we observed that GOLD’s downward momentum is emblematic of a massive capitulation move to force weak shareholders to give up their shares. Therefore, we posit that given GOLD’s well-battered valuation, the downside volatility should abate soon, especially if a bottoming process starts to form.

As such, we revise our rating on GOLD from Hold to Buy and urge investors to start layering in.

Don’t Give In To Energy, Yields, And USD Fears

Barrick Gold All-in sustaining costs (gold) change % (Company filings)

The company highlighted that surging energy costs continue to impact its all-in-sustaining costs (AISC) for its production, as its gold AISC surged 11.5% YoY in FQ2, up from Q1’s 4.8%. Therefore, what appears to be a normalized growth cadence gave way to higher production costs, as management also highlighted:

We are still forecasting to be within annual production guidance. Due to higher energy prices, which flowed through to the cost of consumables and global supply challenges, both provoked by the crisis in Ukraine, costs are expected to be at or above the top end of our guidance, depending on how energy prices play out in the second half of the year. (Barrick Gold FQ2’22 earnings call)

Barrick Gold realized price (gold) change % (Company filings)

Furthermore, the reacceleration in Barrick’s realized price for gold has stalled in Q2. Moreover, the recovery in gold prices lost momentum in early August, which has also fallen further post-Jackson Hole. Therefore, the market appears to be giving way to pessimism, amid concerns about the impact of surging yields and a rising USD.

However, we urge investors not to be unduly concerned about runaway energy prices that seem unable to stop. In a recent Energy ETF (XLE) article, we highlighted that the buying upside in Henry Hub natural gas futures appears to be stalling near its July/August highs. In a recent Occidental (OXY) article, we also highlighted that the recovery momentum of WTI crude also appears to be struggling.

Therefore, we believe that the market remains tentative over pricing in higher energy growth prospects, given an increased likelihood of a recession. Consequently, we are confident that the energy headwinds that impacted Barrick Gold’s production costs should abate moving forward.

Gold futures price chart (weekly) (TradingView)

Also, we noted that gold futures appear to have robust medium-term support at the $1,650 level as it closes in with the August collapse. Hence, we are confident that the support zone (which has held resiliently since March 2021) should provide much-needed relief for gold prices moving ahead.

GOLD’s Valuation Has Been Battered Tremendously

GOLD EV/NTM EBITDA valuation trend (koyfin)

Also, GOLD’s NTM EBITDA multiples last traded quite close to its two standard deviation zone below its 10Y mean. Notably, that zone has underpinned the bottom in GOLD’s valuation over the past ten years. Therefore, we are confident that the market has likely adequately de-risked Barrick Gold’s near-term headwinds.

Is GOLD Stock A Buy, Sell, Or Hold?

GOLD price chart (monthly) (TradingView)

As seen in GOLD’s long-term chart, the capitulation move to force a rapid bottom broke its December 2021 lows. It also appears to be moving toward its March 2020 COVID lows. However, we would like to highlight that such a rapid downward move is often unsustainable, as the market forces shareholders to capitulate near critical support zones.

As seen above, we believe that GOLD is already within two critical support zones. A return of buying support could help form a long-term bottoming process, undergirding its subsequent recovery.

We believe a re-rating is in store with an attractive valuation and more constructive price action. However, we must caution that due to the lack of a bear trap price action, potential near-term downside is still possible, given the selling momentum. Hence, investors looking to add exposure should consider layering in over time.

Accordingly, we revise our rating on GOLD from Hold to Buy.

Leave a Reply

Your email address will not be published. Required fields are marked *