The recovery in the TSX Index to start 2019 has pushed some stocks back toward all-time highs, while others that have been out of favour for some time are picking up a nice tailwind and still appear oversold.
Barrick Gold was a $50 stock when gold hit US$1,900 per ounce in 2011. Unfortunately, a bad takeover decision combined with a multi-year gold rout put the company in a rough spot with a mountain of debt and falling margins.
In fact, debt hit US$13 billion and the stock fell below $9 per share in early 2015. Since then, management has made good progress on its turnaround efforts. The balance sheet has been repaired, and Barrick is now back in growth mode, but with a much more focused approach. The company even increased the dividend.
The company recently merged with Randgold Resources in a deal that created a mining company with five of the top 10 mines on the planet. Now, Barrick has its sights on a US$18 billion deal to acquire Newmont Mining. It is early stages, and the two companies might not come together, especially as Newmont already has an agreement in place to buy another major player in the industry. However, a successful tie-up would create a mining giant and possibly set the stage for a flurry of consolidation in the gold sector.
Critics of the new wave of mega mergers say the industry is back to its old tricks of egos battling it out to be king of the mountain, while those in favour of the merger activity say this is the beginning of a new resurgence in the gold sector.
At this point, it is too early to tell, but the price of gold has staged a nice recovery in recent months, and we all know commodities tend to move in big cycles. If this is the beginning of a new gold recovery, Barrick could well double from its current price of $17 per share in the next couple of years.
Should you buy?
You have to be a gold bull to own any of the gold stocks, and there is a chance the recent strength in the price of gold could turn out to be another head fake. As such, I wouldn’t back up the truck, but it might be an interesting time to take a contrarian position in Barrick, just in case this turns out to be inning one of a new rally in the gold market.
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Fool contributor Andrew Walker owns shares of Newmont.