About 50% of its production comes from North America, with the balance from Africa/Middle East (32%) and Latin America/Asia Pacific (18%).
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.
Also, 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 nearly zero debt net of cash. Major risks include the possibility of a decline in gold prices, production problems at its mines, a major acquisition and/or an expropriation of one or more of its mines.
On May 4, Barrick reported adjusted earnings of $0.26/share, about 10% lower than a year ago but 8% above the consensus estimate. Profits fell even though the realized price of gold rose 6%, as gold production fell 10% and overall costs rose 2%. Copper results were relatively stable from a year ago.
Despite the weak gold production, management said that they remain confident in reaching their full-year production guidance. One of our eternal frustrations with gold mining companies is that their costs seem to rise and fall with the price of gold.
While we look at the detailed data underlying the costs, we’ve yet to find a compelling and consistent rationale for this in what should be essentially a fixed cost operation. Despite this annoying conundrum, and the generally OK but not great results, we are retaining our Buy rating and price target.
Barrick’s cash balance net of debt surged to $743 million, as cash flow from operations was augmented by receipt of accumulated dividends from the Kibali mine in the Democratic Republic of Congo after a new agreement was reached last year, as well as from the sale of non-core assets.
In keeping with its new dividend policy, the company is paying a $0.10/share bonus quarterly dividend on top of its $0.10/share base quarterly dividend. The shares have about 30% upside to 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.