Buy Barrick Gold with Limit of $25.53
Barrick Gold Corp. (ABX:TSX; GOLD:NYSE, US$25.49), the world's second largest gold producer, has been transformed since it merged with Randgold and the latter's Dr. Mark Bristow took over as CEO. Today, it is not only one of the largest gold miners, but one of the best and one of the most undervalued.
Bristow is a dynamo. In his less than two years at the helm, Bristow has dramatically cut the company's debt; has cut costs, including slashing the bloated Toronto corporate headquarters; has visited every one of the company's operations around the world; has reacquired Acadia Mining and solved political problems in Tanzania (and is working on Papua New Guinea); and has achieved the decades-old goal of combining Barrick's and Newmont's Nevada operations, cutting duplicative overhead.
A global powerhouse
The result is a company focused on "profitable ounces" instead of growth, with a strong balance sheet. Barrick always had world-class assets, but now is making them work for the benefit of shareholders. The company has gold and copper assets in 13 countries, primarily in North and South America, the Caribbean and Africa. It has several development projects in the same jurisdictions, with 71 million ounces of gold reserves. Barrick uses the conservative$1,500/ounce to determine reserves.
Production of both gold and copper has increased, 2019 over 2018, and most of this year. With a meaningful decline in capital expenditures of about 30% over the next four years, Barrick is forecasting modestly rising production around the 5 million ounce-equivalent level, with more than half of that coming from mines in North America. All-in sustaining costs are in the mid-$900s, down from over $1,000/ounce. With lower costs and high gold prices, Barrick's margin has expanded from $694 in the second quarter to $940 in the third quarter. We can expect that trend to continue so dramatically, but the focus of efficient operations is paying off.
Barrick has a deep exploration pipeline, as deep as any major company. The new corporate structure is flat, with regional offices focused on operations. One of the most significant improvements has been in the balance sheet, with net debt down to around $1 billion, and around $4 billion in cash. Most debt maturities are not until 2033 and beyond, so we may not see much of a reduction in absolute debt levels going forward, but the company is in its best financial shape in well over a decade. In 2012, the company has almost $12 billion of net debt.
The stock has responded to the change in culture
A major change is in the culture. Barrick had acted in a very pro-cyclical manner, putting on hedges when gold was low, making high-priced acquisitions and taking on debt at the highs. That has changed. The focus now is on "profitable ounces" and efficient operations. It is not a wonder that Warren Buffett's Berkshire Hathaway decided to invest in Barrick earlier this year.
The stock has responded to Mark Bristow's leadership, moving from lows in the $10/share range in late 2018. This year it has performed well in response to higher gold prices, up from $16/share in the March selloff to the current price, but down from over $29/share earlier this month, to its lowest level since mid-June. It is trading at a price-to-cash flow multiple under 10 times, and free cash flow multiple of 17 times. It is trading just over two times book. These multiples are lower than most other major gold miners.
Now, at under $26/share, you have an opportunity to buy one of the best gold companies at a good price. We rank this as mid-risk in our investment pyramid.
Originally posted on November 17, 2020.
Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."
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