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3 Ways To Maximize Barrick Gold Shares As Commodity Recovers

By (Tezcan Gecgil/ )Stock MarketsNov 30, 2021 01:25
3 Ways To Maximize Barrick Gold Shares As Commodity Recovers
By (Tezcan Gecgil/ )   |  Nov 30, 2021 01:25
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  • Canadian miner GOLD stock is down almost 15% in 2021.
  • Despite the decline in price, Barrick Gold has a robust balance sheet, steady free cash flow generation, and fundamental metrics that offer increasingly attractive valuation levels.
  • Long-term investors looking for exposure to gold and copper could consider buying GOLD shares now.

Investors in Canadian gold and copper miner Barrick Gold (NYSE:GOLD) have not had a good year in 2021. Year-to-date, GOLD stock has lost 14.9%. By comparison, gold is down about 3.5%. On the other hand, copper, which Barrick also mines, is up about 19%.

Gold Weekly
Gold Weekly

In August 2020, Barrick Gold shares went over $31 to hit a multi-year high. But since that peak, they are down 37.5%, hovering around $19.40. The stock’s 52-week range has been $17.56–$25.23, and the current price supports a dividend yield of 1.86%.

The miner “has gold and copper mining operations and projects in 13 countries in North and South America, Africa, Papua New Guinea and Saudi Arabia.” Management announced Q3 metrics on Nov. 4.

Revenue was $2.82 billion, down from $3.54 billion last year. Net earnings of $347 million translated into EPS of 20 cents. A year ago, comparable numbers had been $882 million or 50 cents per share. The decrease was mainly due to lower sales. CEO Mark Bristow said:

“The operating cash flow of $1,050 million and the free cash flow of $481 million for Q3 would further support an already strong balance sheet and the funding of Barricks capital allocation priorities.”

Despite management’s upbeat tone, investor reaction has been muted. Prior to the release of the quarterly results, GOLD shares were shy of $20. On Nov. 17, they went over $21, and on Nov. 26, they closed at $19.38.

What To Expect From Barrick Gold Stock

Among 23 analysts polled via, GOLD stock has an “outperform" rating.

GOLD Consensus Estimate
GOLD Consensus Estimate


Among the participants, there also a 12-month median price target of $26.64, implying an increase of about 37.5% from current levels. The 12-month price range currently stands between $8.11 and $36.00.

Similarly, according to a number of valuation models, such as those that might consider dividends, P/E multiples or the 10-year Discounted Cash Flow (DCF) growth exit method, the average fair value for GOLD stock stands at $26.01.

Moreover, we can look at the company’s financial health as determined by ranking it on more than 100 factors against peers in the materials sector. In terms of growth and profit health, Barrick Gold scores 4 out of 5 (top score), and thus has great performance.

Trailing P/E, P/B and P/S (based on Last Twelve Months or LTM) ratios for Barrick stock stand at 17.2x, 1.4x and 2.8x, respectively. By comparison, average ratios for the sector are 4.8x, 1.6x and 1.1x.

Readers who watch technical charts might be interested to know that, despite the price decline in the past several weeks, a number of GOLD stock’s short-term indicators are still cautioning investors. However, intermediate-term indicators are beginning to improve.

As part of the short-term sentiment analysis, it would be important to look at the implied volatility level (IV) for GOLD stock options, which typically shows traders the market's opinion of potential moves in a security. However it does not forecast the direction of the move.

GOLD’s current implied volatility is 34.1, which is higher than the 20-day moving average of 31.8. In other words, IV is trending up, which might mean that the options market is expecting more choppiness in the coming days.

Our first expectation is for GOLD stock to continue to slide down toward $19, or even $18.5, after which it should find support. Then it will likely trade sideways between $19 and $20 and establish a new base. Then, a new bullish move is likely to start.

3 Possible Trades On GOLD Stock

1. Buy Barrick Gold Shares At Current Levels

Investors who aren't concerned with daily moves in price and who believe in the long-term potential of the company could consider investing in GOLD stock now.

On Nov. 26 shares closed at $19.38. Buy-and-hold investors should expect to keep this long position for several months while the stock makes an attempt toward $26.64, a level which matches analysts’ estimates. Such an up move would mean a return of over 37% from the current level. Those long-term investors would also receive dividends.

Readers who plan to invest soon but are worried about large declines might also consider placing a stop-loss at about 3-5% below their entry point.

2. Buy An ETF With GOLD As A Holding

Readers who do not want to commit capital to Barrick Gold stock but would still like to have exposure to the shares could consider researching a fund that hss the company as a holding.

Examples of such ETFs include:

  • VanEck Gold Miners ETF (NYSE:GDX): The fund is down 10.8% YTD, and GOLD stock’s weighting is 10.60%;
  • VanEck Africa Index ETF (NYSE:AFK): The fund is down 1.5% YTD, and GOLD stock’s weighting is 2.35%;
  • iShares North American Natural Resources ETF (NYSE:IGE): The fund is up 33.8%YTD, and GOLD stock’s weighting is 1.86%;
  • iShares MSCI Canada ETF (NYSE:EWC): The fund is up 23.8% YTD, and GOLD stock’s weighting is 1.73%.

3. Cash-Secured Put Selling

Investors who are bullish on the stock, or would consider buying Barrick Gold shares at a level less than the current price could consider selling a cash-secured put option in GOLD stock—a strategy we regularly cover. As it involves options, this set-up will not be appropriate for all investors.

A put option contract on Barrick Gold stock is the option to sell 100 shares. Cash-secured means the investor has enough money in his or her brokerage account to purchase the security if the stock price falls and the option is assigned.

Let's assume an investor wants to buy GOLD stock, but does not want to pay the current price of $19.38 per share. Instead, the investor would prefer to buy the shares at a discount within the next several months.

One possibility would be to wait for Barrick Gold stock to fall, which it might or might not do. The other possibility is to sell one contract of a cash-secured GOLD put option.

So the trader would typically write an at-the-money (ATM) or an out-of-the-money (OTM) put option and simultaneously set aside enough cash to buy 100 shares of the stock.

Let's assume the trader is putting on this trade until the option expiry date of 18 February 2022. As the stock is $19.38 at time of writing, an OTM put option would have a strike of $19.

Thus the seller would have to buy 100 shares of Barrick Gold at the strike of $19.00 if the option buyer were to exercise the option to assign it to the seller.

The GOLD 18 February 2022, 19-strike put option is currently offered at a price (or premium) of $1.17.

An option buyer would have to pay $1.17 X 100, or $117, in premium to the option seller. This premium amount belongs to the option seller no matter what happens in the future. The put option will stop trading on Friday, Feb. 18.

Assuming a trader would enter this cash-secured put option trade at $19.38 now, at expiration on Feb. 18, the maximum return for the seller would be $117, excluding trading commissions and costs.

The seller's maximum gain is this premium amount if GOLD shares close above the strike price of $19.00. Should that happen, the option expires worthless.

If the put option is in the money (meaning the market price of Barrick Gold stock is lower than the strike price of $19.00) any time before or at expiration on Feb. 18, this put option can be assigned. The seller would then be obligated to buy 100 shares of GOLD stock at the put option's strike price of $19.00 (i.e., at a total of $1,900).

The break-even point for our example is the strike price ($19.00) less the option premium received ($1.17), i.e., $17.83. This is the price at which the seller would start to incur a loss.

Cash-secured put selling is a moderately more conservative strategy than buying shares of a company outright at the current market price. This can be a way to capitalize on the choppiness in GOLD stock in the coming weeks.

Investors who end up owning Barrick Gold shares as a result of selling puts could further consider setting up covered calls to increase the potential returns on their shares. Thus, selling cash-secured puts could be regarded as the first step in stock ownership.

3 Ways To Maximize Barrick Gold Shares As Commodity Recovers

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3 Ways To Maximize Barrick Gold Shares As Commodity Recovers

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