Known as the second-largest gold producer globally, Barrick Gold (NYSE:GOLD) is a Canadian-based mining house that has experienced notable change over the past three years—which could result in significant upside for GOLD stock.
Barrick stock has lost nearly a third of its value since this time last year. The reasons are still unknown, but I suspect it to be due to underwhelming gold prices, capital outlay on recent acquisitions, or perhaps global supply-chain concerns.
However, essential key drivers suggest the stock might outperform the industry and the broader market soon. Thus, I’m extremely bullish on GOLD stock and think it’s only a matter of time before the rest of the market sees its potential too.
Management Changes, Acquisitions and Joint Ventures
Back in 2019, Barrick Gold and Randgold merged, creating the largest gold mining house on the planet—at the time. Along with the merger, a new CEO was appointed: Mark Bristow. Bristow spent the majority of his career at Randgold, where he specialized in dealmaking on tight budgets. Bristow was pivotal to Randgold’s pre-merger success, and many believe he’ll be the one to take Barrick Gold into a new level.
The merger has brought about a more sustainable line of earnings with 3-year constant annual revenue and EBIT growth rates coming in at 17.93% and 32.17%, respectively. In the year 2019 alone, the firm’s operating earnings grew by 30%.
The merger also laid a platform for an exploration venture. In 2019, Barrick and Newmont (NYSE:NEM) teamed up to create a joint-venture called “Nevada Gold Mines,” (NGM) which aims to take advantage Nevadan open-cast and deep-pit gold mines. It’s still a potential cash cow for Barrick, who owns 61.5% of the project.
The pandemic and lockdowns disrupted the NGM project. And when those lockdowns ended, maintenance was required, which drove down Barrick’s second-quarter production by 9%. But the maintenance is a temporary issue, and I think Barrick will benefit greatly from the NGM project in the future.
Key Metrics for GOLD Stock
Barrick has managed to reduce its debt burden significantly—nearly halving its debt/equity ratio to 11.4% since 2019. Simultaneously, the company has also improved its capital expenditure by 20.07% over the past year. Capex and leverage ratios usually move in opposite directions, but a 39.98% operating margin and a 43.14% increase in operating cash flow over the past year mean that Barrick’s producing high-quality earnings, which is allowing it to pay-off its debt and invest in projects simultaneously.
As a consequence of its sublime profitability ratios, Barrick now holds an interest coverage ratio of 16.92. This ratio means GOLD has the capacity to take out a large sum of debt instead of issuing additional shares if it would like to expand even further. So shareholders are unlikely to get diluted anytime soon.
Why Buy a Gold Stock Now?
Gold prices haven’t experienced the same kind of inflationary assistance as other commodities have over the past 18-months, and there are suggestions that they’ll decrease in 2022 due to an anticipated rising 10-year yield. However, Barrick Gold has allocated most of its capital at a gold price below $1200 per ounce, which provides its profit margins with significant breathing room. For these reasons, I think investors should view Barrick Gold differently from other gold mining stocks; it’s a firm that’s thriving off of high margins.
On the date of publication, Steve Booyens did not hold any long or short positions in any of the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Steve Booyens co-founded Pearl Gray Equity and Research in 2020 and has been responsible for equity research and PR ever since. Before founding the firm, Steve spent time working in various finance roles in London and South Africa, and his articles are published on various reputable web pages such as Seeking Alpha, Benzinga, Gurufocus, and Yahoo Finance. Steve’s content for InvestorPlace includes stock recommendations, with occasional articles on crowdfunding, cryptocurrency, and ESG.