Barrick Gold (GOLD), based in Toronto, is one of the world’s largest and highest quality gold mining companies; yet, the market has little interest in these shares, notes Bruce Kaser, editor of Cabot Undervalued Stocks Advisor.

Yet, Barrick will continue to improve its operating performance (led by its new and highly capable CEO), generate strong free cash flow at current gold prices, and return much of that free cash flow to investors while making minor but sensible acquisitions.

Barrick shares offer optionality — if the unusual economic and fiscal conditions drive up the price of gold, Barrick’s shares will rise with it. Given their attractive valuation, the shares don’t need this second (optionality) point to work — it offers extra upside. Barrick’s balance sheet has more cash than debt.

On November 4, Barrick reported reasonable third-quarter results. Revenue slipped 20% from a year ago, due to 14% lower gold volumes and 8% lower gold prices which were fractionally offset by higher copper revenues. Lower revenues partly offset by controlled costs led to a 25% decline in adjusted EBITDA.

About 50% of its production comes from North America, with the balance from Africa/Middle East (32%) and Latin America/Asia Pacific (18%).

Importantly, Barrick reiterated its full-year production guidance for 4.4 to 4.7 million ounces of gold, helped by improved output at its Nevada Gold Mines and successful operational turnarounds at previously troubled mines in Tanzania and Argentina.

We want to see mining companies at least meet their production guidance, as it indicates that the company has a good handle on its mines’ operations. Barrick continues to boost production through mine upgrading and re-openings, capital spending remains restrained.

Barrick is looking for acquisitions in Canada but said it will remain careful about valuation. The balance sheet and free cash flow remain strong. As the shares appear to have bottomed out for now, this might be a good time to buy more Barrick shares.

Fundamentally, the company is doing well and has solid leadership, quality mines and a very strong balance sheet. It might take a long time, but we remain confident that eventually the shares will hit our $27 price target. The target is based on 7.5x estimated steady-state EBITDA and a modest premium to our estimate of $25/share of net asset value.

At some point, the economy and capital markets will become more volatile, and the Fed and Congress will unleash more aggressive stimulus, providing what is likely to be an unmitigated positive for gold prices and for Barrick shares.

On its recurring $0.09/quarter dividend, GOLD shares offer a reasonable 1.7% dividend yield. Barrick will pay an additional $0.42/share in special distributions this year (no clarity on 2022 special dividends), lifting the effective dividend yield to 3.8%.

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