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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 (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.