Barrick Gold (GOLD, Financial) has been lurking in the shadows recently, even as gold has hit the spotlight once again as the world's ultimate inflation hedge. CEO Mark Bristow has worked wonders at the company, and I see tremendous potential for its stock given the combination of growth efforts and undervaluation.
Pakistan investment
Let's start with some recent news. Barrick has tabled an investment worth $7 billion in one of the world's largest undeveloped gold and copper deposits in Pakistan's Reko-Diq. Assuming Barrick succeeds with this investment, the project would commence a six-year timeline with a rigorous deep mining exploration surge being the first task to complete.
The latest geophysical report, which was produced in 2010, claimed that the mine had a lifespan of 56 years with a 40 million ton per year throughput. It's still debatable whether Barrick's cost-outlay will be met, but with a CapEx-to-sales ratio of 20.32%, I think that it could be a lucrative investment.
The state of the precious metals market
Precious metals tend to prosper in a high inflation environment, and with the CPI running at 8.5%, there's no reason to doubt its ex-ante correlation. Additionally, Bitcoin has lost its purpose as an inflationary hedge for now, with gold resurfacing as the primary candidate.
Pricing the stock
Barrick's precious metals portfolio seems undervalued with its stock trading at a 13.20% discount to its five-year average price-sales ratio. Furthermore, Barrick's free cash flow yield of 5.13% suggests that the stock provides value.
I used the Carhart 4-factor model to reach my value estimate for Barrick stock. The model considers company size, value, momentum and a linear market-based model to derive an alpha. The model displayed an alpha of 7.91%, meaning that Barrick could outperform the S&P 500 by 7.91% in any given year. The only downside that Barrick could face is whenever small market capitalization stocks outperform large-capitalization stocks, which is very unlikely given the current macroeconomic headwinds we're facing.
Source: Portfolio Visualizer
The bottom line
Barrick Gold is probably the best precious metals group play out there in my opinion, thanks to the combination of a favorable macro environment, growth efforts in Pakistan and the potential to outperform the S&P 500 based on the Carhart 4-factor model. Gold has re-established itself as the go-to inflation bet during the past year, and Barrick is primed to reap the benefits of this.
