Barrick Gold (GOLD), based in Toronto, is one of the world’s largest and highest-quality gold mining companies; about 50% of its production comes from North America, with the balance from Africa/Middle East and Latin America/Asia Pacific, notes Bruce Kaser, editor of Cabot Undervalued Stocks Advisor.
Barrick will continue to improve its operating performance (led by its 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.
Barrick reported fourth-quarter gold production that rose 13% from the third quarter, but this was about 1% below the guided volume, leading to a modest sell-off in the shares. Meeting production guidance is an indicator of management’s credibility and grip on its operations.
While Barrick’s “miss” was modest, it suggests that the gold mining operations are not performing to management’s expectations, which implies either that management was caught off-guard or that some trait in its production profile made the target unachievable. We don’t see this quarter’s miss as a problem as long as it was a one-off miss.
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.
Investors and commentators offer a wide range of outlooks for the economy, interest rates and inflation. We have our views but hold these as more of a general framework than a high-conviction posture. Investing in gold-related equities is a long-term decision — investors shouldn’t allow near-term weakness to deter their resolve. The stock has 43% upside to our $27 price target.