Barrick Gold Corporation (NYSE:ABX) has rallied 185% since the beginning of the year, as Gold prices have climbed above $1300 per ounce due to more dovish monetary policy guidance from the Federal Reserve, and consequently a weakening US Dollar.
The recent rally follows an 88% wipeout in the stock over four years, as gold prices were plummeting and the company also faced several internal problems. Their biggest problem was the fact that they were highly indebted, even more so than other miners. However, through asset sales and dividend cuts, the company has lowered its debt levels from $13 billion to $10 billion in 2015, and is working on further reducing it to $8 billion in 2016.
Nevertheless, the firm still has a significant level of debt on its balance sheet, and the fact that the recent rally has pushed up its Price to Book (P/B) ratio from 0.9 to a staggering 3.3 has repelled many investors. Especially given the fact that the average P/B ratio for the industry overall is only 1.9.
The indebted gold mining industry in general has had to cut mining and production activity in order to remain solvent. For example, Barrick Gold themselves reduced production from 6.25 million ounces to 6.12 million ounces in 2015, and is forecasted to further reduce production to at least 5.1 million ounces by 2018. Hence the fall in supply will also support gold prices higher.
However, whilst supply cuts would push up gold prices, lower production volume may limit Barrick Gold’s ability to fully benefit from this price increase, and may miss the chance to enhance its profit margins even higher to reward long- term shareholders. As a result, it may potentially end up losing shareholder interest to miners that are expanding production during the gold bull market, which could undermine the ABX stock rally going further.
On the other hand, Barrick Gold holds a considerable strength over other miners, which is the high efficiency of its mines, reinforcing its ability to produce free cash flow. In fact, even if gold falls to $1000 per ounce, the company would still be able to produce a positive cash flow. Its Price to Cash Flow ratio is currently 8.4, which is well below the industry average of 13.5, and also lower than the ratio of the S&P 500 at 9.6. Hence, from this perspective the gold miner still seems attractively valued.
Technical Indicators
The Put/Call ratio for ABX is currently at 0.56, which indicates the fact that investors are more bullish than bearish on the stock, as open interest in call options is higher than in put options. This reflects the positive market sentiment for the stock even after the recent price rally.
However, the Stoch RSI indicator has reached 90.96. A reading between 80 and 100 signals overbought conditions, hence the current level makes the stock seem too expensive for traders to enter now.
Though on the other hand, the recent 10% pullback in the stock has resulted in the Relative Strength Index reaching 47.08, as shown in the chart below, which makes the stock appear less overbought.
Whilst both fundamental and technical indicators show a mixed picture, the ultimate driver of ABX will be the price of gold. Whilst the stock may seem overvalued from certain fundamental perspectives, a surprisingly hawkish Federal Reserve may temporarily pull back the price of gold, which may bring the stock back to more desirable valuations. Traders and investors should stay ready grab any such opportunity to buy, because the long- term trend of gold is upwards.
When loose global monetary policy eventually augments inflation levels back higher, gold will be the main asset used as a hedging instrument. In fact, gold has declined for four years between 2011 and 2015, so at this point a bullish bet is considered wiser than a bearish bet. Therefore, long positions in gold miners such as Barrick Gold should pay off in the longer run.