After a strong rally in 2016, precious metal stocks have taken a rest and Barrick Gold (ABX, Financial) was no exception to this trend. The recent pullback doesn’t mean that the rally has ended and I believe investors should use it to increase their position in the stock.
Improving precious metal prices
Throughout the past few years, precious metals prices have taken a severe downturn, but the prices are considerably improved this year. There are numerous factors that are boosting up gold and silver prices.
Most significantly, it appears interest rates are no longer escalating as quickly as projected, which was weighing on the price of precious metals. Moreover, worldwide economic ambiguity is growing along with the escalating worries that worldwide growth could slow down.
Due to these concerns, demand for tradeable gold is moving upward. As a matter of fact, Barrack Gold is heavily dependent on robust gold prices to boost its profit margin. Therefore, rising gold prices will support the company to gain huge benefits in the imminent quarters.
Apart from this, Barrick also proposes the lowest AISC among major gold miners, with the company reducing its AISC estimate to a midpoint of $770 per ounce throughout the second quarter. As an outcome, this provides Barrick Gold a great shield to protect itself from the downturn in physical gold prices.
Apart from this, China is on its way to guzzle around 1,050 tons of gold this year, with Shanghai Security News projecting 1,200 tons in demand by 2020. Not only this, but the company is gaining advantages from the inferior debt levels as well, as it has paid $4 billion in debt since the beginning of 2015.
Moving onward, the company’s management has set many goals, but the most significant goal is to grow its free cash flow. After reporting negative cash flow in the period of 2012 to 2014, the company has successfully managed to report positive free cash flow in the past five quarters.
After eliminating $610 million in proceeds from a transaction at Pueblo Viejo, which Barrick used for debt payment, it reported $471 million in free cash flow in the previous year. In fact, Barrick Gold is poised to endure its accomplishment, as the company has reported $455 million in the first half of 2016 alone.
Conclusion
Barrick Gold’s pullback looks like a great opportunity for investors who missed out on the 2016 rally, as I expect Barrick Gold to regain its momentum very soon.
Disclosure: I don't hold a position in the stock mentioned in the article.
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