Barrick Gold: Fourth Quarter Production Results Drive Share Price Upward (NYSE: GOLD)
As I mentioned in my previous article, although gold is not a true inflation hedge, I think Barrick (GOLD) is a great company and a great way to gain exposure to the gold space. Based on 4Q21 production results, I’m revising my valuation up $2 per share. In other words, at 1,800/oz, the fair value is $28/share.
4Q21 and full year 2021 results
While gold production declined by 6.8% in 2021 from 4.760 Moz to 4.437 Moz, it was slightly above the lower end of the forecast at 4.437 Moz compared to the forecast of 4.4 to 4.7Moz. In general, sales were in line with production, except in Veladero and Pueblo Viejo where there was a reduction in inventories to meet the increase in sales.
Compared to 3Q21, production increased by 10%, from 1.092 Moz to 1.203 Moz. Nevada gold mines contributed 98% of this production growth. Nevada Gold Mines production increased by 22% or 109koz. There was significant growth at seven gold mines which offset the decline at the remaining mines. The other seven mines are Pueblo Viejo (19% or 20koz), Veladero (36% or 13koz), Loulo-Gounkoto (9% or 11koz), Tongon (22% or 9koz), Hemlo (35% or 9koz), North Mara (5% or 3koz) and Bulyanhulu (8% or 3koz).
Copper production has declined faster than gold production. Copper production fell 9.2% in 2021, from 457 Mlb to 415 Mlb, but was in line with Barrick’s guidance of 410-460 Mlb.
Compared to 3Q21, copper production increased 26% or 26 million lbs. Lumwana contributed 81% of this growth by increasing production by 37% or 21 million lbs. The remaining 2 copper mines have also developed. Zaldivar is up 13% or 3Mlbs and Jabal Sayid is up 11% or 2Mlbs.
The current dividend yield is 2.6%. If gold prices stay at this level, I expect strong cash flow over the medium term which could be used to pay down debt, buy back shares and support the dividend. Since net debt is insignificant ($111m in 3Q21), I expect the company to redirect more free cash flow to increase the dividend or share buybacks, which would indirectly increase dividends future.
I updated my valuation by incorporating 4Q21 production results and adjusting the production curve slightly upwards. As a result, the valuation increased by $2/share to a long-term gold price of 1,800/oz.
For a gold price of 1500/oz the fair price is $19/share, and at 2000/oz it is $37/share. I see support for gold to remain above $1,800 in the medium term. The FOMC seems uneasy with the outlook for inflation and is expected to start raising rates next month. Finally, the Fed admitted that monetary policy is not aligned with economic fundamentals. While I expect the Fed to hike a total of 100 basis points in 2022 and another 100 basis points in 2023 to a rate of 2.25%, we don’t know if that will be enough to combat inflation. On the other hand, if they raise the rate too much too fast, the impact on inventory and housing may be too great for the system to bear.
As for copper, I expect prices to remain high for at least the next five years. There are supply issues as demand for the metal is expected to increase significantly. Chile produces 40% of the world’s copper production. Escondida, the largest mine in Chile, is at peak production, under threat of closure by the Chilean government due to its water consumption, and there are frequent strikes at this mine.
On the demand side, copper is needed for solar panels, wind turbines, electric vehicles and battery storage, all of which are expected to grow significantly in the coming years. Even with copper supply challenges, replacing the metal is difficult, and according to the IEA, “copper will remain the most widely used metal in renewable energy technologies.” This is why the metal is expected to experience explosive growth during this decade. Goldman Sachs predicts copper demand will grow 600% by 2030.
This capping of supply and increased demand will cause copper prices to rise from the current $4.40 per pound to $5.25, as forecast by CIBC.
4Q21 production results have been excellent and I expect 4Q21 and fiscal 2021 financial results to be good. By updating the 4Q21 production model and increasing the production curve, my valuation increased by $2 per share to $28 per share offering a 43% upside, all while offering a dividend yield of 2 .6%.