I’m not generally a fan of gold, but gold miners are a different story. This is due to a phenomenon called operating leverage, where earnings rise faster than the metal itself, notes Adam Johnson, editor of Bullseye Brief.
At the risk of oversimplification, digging $2,000 gold is significantly more profitable than digging $1,000 gold… since the same machine is working the same 10-hour shift, but generating twice the revenue. Gold rose to a new all-time high last year as negative real yields undermined the purchasing power of paper currencies.
Since governments are still borrowing, and central banks are still holding rates down, I think gold prices will trend higher. I could buy futures, but I think I’ll make more owning a miner… especially one returning cash to shareholders in the form of special dividends. It’s like owning a call option that pays cash in the meantime.
Barrick Gold Corp. (GOLD) ranks as the world’s second largest gold producer behind Newmont Mining (NEM), but beats every peer on profitability as the lowest cost producer. Barrick’s unique ability to generate industry-leading cashflow per ounce reflects strong operating leverage.
The company embarked upon a strategic realignment of mining assets two years ago, as respected industry veteran Mark Bristow took over as CEO. Benefits of his leadership are now accruing to shareholders in the form of significant earnings growth and multiple special dividends.
I view this stock as a cash-like alternative with upside, reflecting gold’s appeal as a hedge against negative real yields and Barrick’s unique ability to drive incremental ROI. GOLD’s appeal is further enhanced by a 12-15% discount to historic valuation, likely a temporary handicap against pending asset sales.
Barrick is an exceptional operator, with 24 mines across three continents, including 5 of the world’s 10 largest and most productive gold mines… as gold accounts for 95% of output.
- Earnings and dividends have tripled since 2018.
- Leverage has declined dramatically, with net debt falling to zero.
- Mining costs of $698/oz are the lowest in the industry (Bloomberg data).
- Cashflow per ounce is the highest in the industry, and 30% more than the closest competitor.
- ESG ranking in the 95th percentile reflects strong commitment to human rights, worker safety, emissions reduction and water reclamation… despite operating in one of the most historically challenged sectors in the world.
Barrick is as much a macro investment story as it is a micro success in the making, since gold’s primary appeal is as a store of value. This concept has played out in dramatic fashion over the past several years, with the price of gold rising as interest rates adjusted for inflation have become progressively more negative.
In light of Fed Chair Jerome Powell’s most recent comments that unemployment and the economy have a long way to go, I think the underlying appeal of gold remains intact. Gold has traded plus/minus $1,800 for most of 2021, and a return to $2,000/oz. seems reasonable… new highs are not out of the question. This would be very positive for Barrick.
Should gold rise to $2,000, additional EBITDA generated would imply a $30 target for Barrick, and at $2,100 gold, my target would rise to $34. When gold hit an all-time high of $2,060 last year, Barrick traded at $31.
I think the operational improvements born out of the restructuring provide ample support for an even higher valuation… implying upside to my numbers. Barrick is a stronger company than it was sixteen months ago.