The biggest news in gold mining, after the record price, is Warren Buffett's Berkshire Hathaway recent disclosure. They informed the world that they invested in Barrick Gold Corp. (ABX:TSX; GOLD:NYSE).
That sent financial twitter ablaze, because Buffett is a famous gold hater. He famously said in 1998:
"(Gold) gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."
However, even Warren Buffett understands the impact of higher gold prices on gold miners. That's why he bought Barrick.It's not like he bought a ton of metal…he bought 20.9 million shares (1.2% of the company's stock). It's a $565 million bet on Barrick's profits going stratospheric on these higher gold prices.
While that's good news, the recent ding in the gold price took Barrick's shares down. You can see what I mean in the chart below:
That sell off is an opportunity for investors to follow Berkshire's lead.
It only takes a minute to understand Berkshire's attraction to Barrick Gold—it's the same reason I recommended the stock to my readers in July 2019. The company is profitable. Just look at this table:
2018 |
2019 |
2020* |
2021* |
|
Revenue |
$7.2 billion |
$9.7 billion |
$12.1 billion |
$12.8 billion |
Cash from Ops |
$1.8 billion |
$2.8 billion |
$4.3 billion |
$5.0 billion |
Free Cash Flow |
$365 million |
$1.1 billion |
$1.9 billion |
$3.1 billion |
Gold Price (realized) |
$1,267 per oz |
$1,396 per oz |
$1.657 per oz** |
- |
EV to FCF*** |
60 times |
39 times |
31 times |
- |
Data from Bloomberg; *Bloomberg Estimate; **2020 Average through June 30. ***At Year End |
||||
The valuations just keep looking better. I used enterprise value (EV) because it takes debt into account compared to free cash flow (FCF). What we see is that even though Barrick's EV more than doubled since 2018, its valuation fell by half.
That's because of the profit it can make on the higher gold price. It generated a modest $365 million in free cash flow in 2018 when it earned just $1,267 per gold ounce. If we get a full year of the gold price at $1,900 per ounce, Barrick will be hugely profitable.
Based on Bloomberg's 2021 estimate, if you bought Barrick today, you are paying just 19 times enterprise value. It's closest competitor, Newmont Corp. (NEM:NYSE) trades even lower, at just 16 times 2021 free cash flow.
This is a fantastic point to add to our positions in the major gold miners. The ones that are profitable at lower prices will do very well at these much higher gold prices.
Regards,
Matt Badiali
Matt Badiali is a geologist and independent financial analyst. He spent fifteen years researching and writing about great investments inside the natural resources sectors. He can be reached at www.mattbadiali.net.
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