The gold mining industry has not been traditionally known for providing impressive shareholder returns, although it seems that Barrick Gold (NYSE:GOLD) intends to leave this stereotype in the past with 2021 seeing record shareholder returns through special dividends. Whilst these would only amount to a low dividend yield of 3.80% on their current share price and thus hardly seems headline-grabbing on the surface, when digging deeper this era of war and inflation could see a 9% yield thanks to strong support for gold and copper prices.
Executive Summary & Ratings
Since many readers are likely short on time, the table below provides a very brief executive summary and ratings for the primary criteria that were assessed. This Google Document provides a list of all my equivalent ratings as well as more information regarding my rating system. The following section provides a detailed analysis for those readers who are wishing to dig deeper into their situation.
*Instead of simply assessing dividend coverage through earnings per share cash flow, I prefer to utilize free cash flow since it provides the toughest criteria and also best captures the true impact upon their financial position.
Even though their cash flow performance dipped during 2021 versus their very strong pandemic gold-rush driven results during 2020, they still produced a solid $4.378b of operating cash flow that left $1.373b of free cash flow after subtracting their $2.435b of capital expenditure and further $570m of miscellaneous cash expenses, which forms an important part later in this analysis. This free cash flow was completely returned to their shareholders through special dividends of $750m that boosted their existing dividend payments of $634m, thereby making for a record year of shareholder returns that should continue into the future thanks to their strong outlook for free cash flow, as the graph included below displays.
It can be seen that management recently forecast to generate accumulated free cash flow of circa $20b throughout 2022-2026 if gold prices hold around their current level of $1,900/oz to $2,000/oz and to a lesser importance, if copper prices also continue trading strongly. Despite the tragic loss of life, war is a powerful driver of gold prices, not to mention inflation that is roaring back after years of very loose monetary policy and supply chain disruptions and thus it seems reasonable to expect strong gold prices to continue into the foreseeable future. Even if the Russia-Ukraine war ended today, the tensions between the West and East would still remain high for many years with various other flashpoints persisting, ranging from the sovereignty of Taiwan to the nuclear weapons of North Korea and possibly, Iran. Despite their different complexities, these will likely see a new era of higher geopolitical tensions that supports strong gold prices whilst at the same time, the world transitions to clean energy and electric vehicles, thereby supporting strong copper prices.
Notwithstanding the tragic loss of life, this seemingly new era the world has entered appears very positive for their shareholder returns given their willingness to align their dividends with their free cash flow. Their five-year circa $20b of accumulated free cash flow equates to circa $5b per annum and thus would indicate a very high near 12% free cash flow yield on their current market capitalization of approximately $42b, although there are still two important caveats to consider.
The first relates to how they calculate their free cash flow since it can differ due to being a non-GAAP metric, which they state was $1.943b during 2021, as per slide four of their fourth quarter of 2021 results presentation. This differs from my free cash flow calculation of $1.373b because they simply subtract their capital expenditure from their operating cash flow, whereas my approach also considers their various other miscellaneous cash expenses, as listed beneath the first graph included above and were $570m during 2021. The primary contributor was their distributions to non-controlling interests that were partly offset by a variety of smaller miscellaneous cash incomes, such as dividends received from equity method investments. Each investor is entitled to their own views but in my eyes, these should be subtracted when calculating their free cash flow to best represent the cash available to fund their shareholder returns. Whilst they will naturally vary across the years, it seems that the $570m seen during 2021 makes for a reasonable midpoint between their high of $1.136b during 2020 and low of only $84m during 2019.
The second caveat relates to the exclusions from their free cash flow estimations, which do not include their interest, exploration nor general sales and administration expenses, as noted at the bottom of slide twenty-five of their previously linked fourth quarter of 2021 results presentation. Throughout 2021 these were $303m, $287m and $151m respectively, thereby totaling $741m that if also subtracted from the circa $5b per annum free cash flow estimation from management leaves circa $3.7b of estimated free cash flow as per my more stringent calculations. Despite this lower free cash flow, it still nevertheless sees a high near 9% free cash flow yield against their current market capitalization of approximately $42b, which shareholders can expect to see directed towards their pockets given their extremely clean financial position that sports zero leverage.
Following years of focusing upon deleveraging, they ended 2020 with a very impressive $33m net cash position that has grown slightly to $130m following the end of 2021, despite their record shareholder returns thanks to relatively minor divestitures and exchange rate movements. This obviously means that they have zero leverage, thereby making it redundant to assess their leverage any further since they clearly have no handbrakes upon returning all of their free cash flow to their shareholders. When looking ahead, the price of gold and copper will continue fluctuating but thankfully, this nevertheless still supports the potential to see a high single-digit dividend yield that could even reach near 9% on current cost as they have few options but to keep returning their free cash flow to their shareholders.
When turning to their liquidity, rather unsurprisingly, their very large cash balance of $5.28b firmly places it within the strong territory with current and cash ratios of 3.95 and 2.53 respectively. This should easily be maintained in the future as they continue generating free cash flow at a variety of different gold and copper prices whilst their variable shareholder returns policy adjusts their cash outflows to suit the prevailing operating conditions. Since they enjoy a net cash position, they have no issues meeting future debt maturities, plus as a dominant player in the gold mining industry, they should see easy access to debt markets if required, even if central banks tighten monetary policy.
The idea of profiting from war is certainly not appealing but objectively speaking, the world seems to be entering a new era of higher geopolitical tensions and inflation, which are both powerful drivers for higher gold and copper prices. Since they have the benefit of zero leverage, their shareholders stand to see their pockets swell with more special dividends likely forthcoming, thereby seeing the potential for a high near 9% yield on current cost and thus I believe that a buy rating is appropriate.
Notes: Unless specified otherwise, all figures in this article were taken from Barrick Gold’s SEC filings, all calculated figures were performed by the author.