About 50% of its production comes from North America, with the balance from Africa/Middle East (32%) and Latin America/Asia Pacific (18%). The shares are out of favor as investors have lost interest in commodity gold and, to a lesser extent, due to concerns that the company will be unable to meet its production targets, may make a major acquisition or have one or more of its mines expropriated by local governments.
We are more optimistic about the company’s prospects and find its shares significantly undervalued. A major turning point in the company’s fundamentals was Barrick’s acquisition of Randgold at the start of 2019, whose CEO, the highly regarded Mark Bristow, became the new head of Barrick.
Bristow brings deep experience in improving mine operational efficiency as well as a track record of success in assuaging local governments that otherwise might be more aggressive in claiming large cuts of the company’s in-country mines.
His deal-making prowess led to a new joint venture with Newmont that combined their Nevada mines into a single, more efficient operation. If Barrick were to make any acquisitions, we believe they would be of modest size and priced at reasonable valuations, given shareholder pressure to allocate its capital efficiently.
Barrick remains on-track to meet its annual production guidance. Its longer term production plan calls for modest growth with reasonable capital spending, such that it should continue to generate considerable free cash flow at current gold prices.
Central to our interest is that Barrick will continue to return much of its free cash flow to shareholders through dividends and share repurchases. In 2021, the company’s regular and special dividends generated a 4% dividend yield. Barrick has repaid much of its debt in recent years, such that it now carries cash balances that nearly fully offset its debt.
In addition to the value created through its generous free cash flow, Barrick shares offer optionality — if the unusual economic, monetary 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. We have a $27 price target, based on 7.5x estimated steady-state EBITDA and a modest premium to our $25/share estimated net asset value.
A Look Back at 2021's Top Performers
Bruce Kaser chose two excellent performers last, including one that gained over 200%. Here, he offers updates on his Top Picks for 2021.
We first recommended Signet Jewelers Ltd. (SIG) in September 2019. Under Gina Drosos — who became CEO in August 2017 — the company not only adeptly navigated the pandemic, it has also moved into the vanguard of jewelry merchandising, retailing and e-commerce. The credit issues were fully resolved, the balance sheet is now “fortress-like” and Signet is generating strong free cash flow.
The stock — which we chose as our Top Pick for 2021 — gained 211% last year. We moved the shares to a Sell in early November of 2021 at just over $104 as the risk/return trade-off became unfavorable, for a 505% total return since the position’s inception.
If its fundamental strength continues, Signet could see its shares continue to surge. With its $4.6 billion market value and strong balance sheet, a private equity company could easily acquire Signet, likely at a high premium. As such, we suggested that shareholders consider keeping a stub position that could participate in any further price gains.
Wells Fargo & Company (WFC) — our conservative Top Pick for 2021 — rose 63% last year. In mid-2020, when we initially recommended WFC shares, investors were worried about potentially sharply higher credit losses due to the pandemic-driven economic shutdown. We were encouraged by the efforts of new CEO Charles Scharf to aggressively restructure the bank’s operations.
Through 2021, the bank’s credit losses remained remarkably low while CEO Scharf continued to execute on his turnaround strategy. Like all banks, Wells is struggling with low interest rates and limited loan growth as well as the regulator-imposed cap on its asset size. But the better financial results led to rising confidence in the bank’s future, driving the shares higher for the year.