3 Ways to Profit from Barrick Gold Stock as the Metals Rebound

  • The stock of Canadian miner GOLD has lost almost 15% in 2021.
  • Despite the price decline, Barrick Gold has a strong balance sheet, steady free cash flow generation and fundamental metrics that offer increasingly attractive valuation levels.
  • Long-term investors seeking exposure to gold and copper might consider buying GOLD stocks now.

Investors in Canadian gold and copper miner Barrick Gold (NYSE:) have not had a good 2021. Year-to-date, GOLD stock is down 14.9%. In comparison, the lost about 3.5%. In contrast, , which Barrick also operates, is up around 19%.

In August 2020, Barrick Gold shares surged above $31 to hit a multi-year high. But since that peak, they have fallen 37.5% and are hovering around $19.40. The stock’s 52-week range is $17.56 to $25.23, and the current price allows for a dividend yield of 1.86%.

The miner “has gold and copper mining operations and projects in 13 countries across North and South America, Africa, Papua New Guinea and Saudi Arabia.” Management announced third quarter results on November 4.

Revenue was $2.82 billion, down from $3.54 billion a year ago. Net income of $347 million translated to EPS of 20 cents. A year ago, the comparable numbers were $882 million, or 50 cents per share. This decrease is mainly due to the decrease in sales. CEO Mark Bristow said:

“The operating cash flow of $1,050 million and free cash flow of $481 million for the third quarter would further support an already strong balance sheet and fund Barrick’s capital allocation priorities. “

Despite management’s optimistic tone, investor reaction was muted. Prior to the release of the , GOLD stock was under $20. On November 17, they broke above $21, and on November 26, they closed at $19.38.

What to expect from Barrick Gold stock

Among 23 analysts surveyed via Investing.com, GOLD stock is rated “outperforming.”

Consensus estimate OR

Chart: Investing.com

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

Similarly, under a number of valuation models, such as those that consider dividends, P/E multiples, or the 10-year discounted cash flow (DCF) growth out method, fair value average for GOLD stock is $26.01.

Additionally, we can examine the company’s financial health, determined by its ranking on more than 100 factors against its peers in the materials sector. In terms of earnings growth and health, Barrick Gold scores 4 out of 5 (best score), and therefore presents an excellent performance.

The P/E, P/B and P/S ratios (based on the last twelve months or LTM) of Barrick stock are 17.2x, 1.4x and 2.8x respectively. By comparison, the industry average ratios are 4.8x, 1.6x and 1.1x.

Readers watching the technical charts may be interested to know that, despite the decline in price over the past few weeks, a number of short-term indicators in GOLD stock are still warning investors. However, medium-term indicators are beginning to improve.

As part of short-term sentiment analysis, it would be important to look at the implied volatility (IV) level of options on the GOLD stock, which typically shows traders the market’s view of potential price moves. ‘a title. However, it does not predict the direction of movement.

The current implied volatility of GOLD is 34.1, which is above the 20-day moving average of 31.8. In other words, implied volatility tends to rise, which could mean that the options market is expecting more turmoil in the days ahead.

First, we expect GOLD stock to continue to slide towards $19 or even $18.5, after which it should find support. Then it should trade sideways between $19 and $20 and establish a new base. Then, a new bullish move is likely to start.

3 possible operations on the GOLD share

1. Buy Barrick Gold shares at current levels

Investors who aren’t concerned about day-to-day price movements and who believe in the company’s long-term potential might consider investing in GOLD stock now.

On Nov. 26, shares closed at $19.38. Investors buying and holding the stock should expect to hold this long position for several months as the stock tries to reach $26.64, a level that matches analysts’ estimates. Such an upward move would mean a return of more than 37% from the current level. These long-term investors would also receive dividends.

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

2. Buy an ETF with GOLD as a stake

Readers who do not want to commit capital to Barrick Gold stock, but still want exposure to the stock, may consider looking for a fund that owns the company.

Here are some examples of these ETFs:

  • VanEck Gold Miners ETF (NYSE:): The fund is down 10.8% since the beginning of the year, and the weighting of the GOLD stock is 10.60%;
  • VanEck Africa Index ETF (NYSE:): The fund is down 1.5% since the start of the year, and the weighting of the GOLD stock is 2.35%;
  • iShares North American Natural Resources ETF (NYSE:): The fund is up 33.8% since the start of the year, and the weighting of the GOLD stock is 1.86%;
  • iShares MSCI Canada ETF (NYSE:): The fund is up 23.8% since the start of the year, and the weighting of the GOLD stock is 1.73%.

3. Writing cash-backed put options

Investors who are bullish on the stock, or who would consider buying Barrick Gold stock below the current price, might consider selling a cash-backed put option on GOLD stock – a strategy that we use regularly. As these are options, this arrangement will not be suitable for all investors.

A put option contract on Barrick Gold stock is an option to sell 100 shares. Cash collateral means the investor has enough money in their brokerage account to buy the security if the stock price drops and the option is assigned.

Suppose an investor wants to buy GOLD stock, but does not want to pay the current price of $19.38 per share. The investor would rather buy the shares at a discount over the next few months.

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

The trader therefore typically writes an at-the-money (ATM) or out-of-the-money (OTM) put option and simultaneously sets aside enough cash to buy 100 shares.

Assume the trader makes this trade until the option’s expiration date, February 18, 2022. With the stock price at $19.38 at the time of writing, a put OTM would have a strike price of $19.

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

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

The option buyer would pay a premium of $1.17 X 100, or $117, to the option seller. This premium belongs to the seller of the option, whatever happens in the future. The put option will cease trading on Friday, February 18.

Assuming a trader now enters this put trade at $19.38, at expiration on February 18, the maximum return to the seller would be $117, not including commissions and trading fees .

The seller’s maximum gain is that premium amount if GOLD’s stock closes above the strike price of $19.00. If so, the option expires worthless.

If the put option is in-the-money (meaning the Barrick Gold stock price is below the strike price of $19.00) at any time before or at expiration on February 18, this put option can be assigned. The seller would then be obligated to buy 100 GOLD shares at the put option strike price of $19.00 (ie for a total of $1,900).

The break-even point in our example is the strike price ($19.00) minus the option premium received ($1.17), or $17.83. It is at this price that the seller begins to suffer a loss.

Writing cash-backed put options is a moderately more conservative strategy than outright buying a company’s stock at the current market price. This may be a way to take advantage of the instability in the GOLD stock in the coming weeks.

Investors who end up owning Barrick Gold shares as a result of writing put options may also consider setting up covered calls to increase the potential return on their shares. Thus, writing cash-backed put options could be considered the first step to equity ownership.

Leave a Comment