Barrick Gold: Quality, Value, And Yield

Gold, Bars, Wealth, Finance, Gold Bars, Deposit

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Barrick Gold (GOLD), based in Toronto, is one of the world’s largest and highest quality gold mining companies. The market has little interest in Barrick shares. Yet, 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.

Barrick reported mixed second-quarter results. Adjusted earnings of $0.29/share rose 26% from a year ago and were about 12% above the consensus estimate.

A production issue reduced its Carlin (Nevada) mine output, but the company said it remains on track to meet full-year total company production guidance. Barrick continues to invest in new mining projects while maintaining a reasonable capital spending budget.

Barrick completed its sale of its interests in the Lagunas Norte mine in Peru for about $81 million. This offloads about $226 million in liabilities, improves Barrick’s overall portfolio, and frees the company from what could have been deeper issues if Peru’s government becomes autocratic. Barrick is working to re-open the Porgera mine in Papua New Guinea.

The threat of local governments taking control of gold mines remains. Recently, Kyrgyzstan nationalized the Kumtor mine previously owned by Centerra Gold of Canada. While expropriation risks an unfavorable response from Western governments, the local countries often do not care. Most of Barrick’s production comes from countries unlikely to expropriate, but takings at the margin will weigh on the shares.

The company declared its regular $0.09/share quarterly dividend and a $0.14/share special dividend to be paid on Sept. 15. The special dividend is the second of three equal payments approved for this year.

On its recurring $0.09/quarter dividend, Barrick Gold shares offer a reasonable 1.8% dividend yield. Barrick will pay an additional $0.42/share in special distributions this year, lifting the effective dividend yield to 3.9%.

The shares have about 35% upside to our $27 price target. The price target is based on 7.5x estimated 2021 EBITDA and a modest premium to its $25/share net asset value. We rate the stock a buy.

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