Having recently completed an extensive research effort on the subject, Daniel Malan of South Africa’s Perspective Investment Management explained to us at the end of last year [VII, December 30, 2018] why he was generally bullish on gold and specifically on the shares of giant mining company Barrick Gold. He saw in gold a reasonably reliable hedge against a significant equity-market decline, and saw Barrick – which was just closing on its acquisition of industry peer Randgold Resources – as uniquely well managed and well positioned to prosper in a rising gold-price environment.
So far, so good. While equity markets have forged higher, heightened global macroeconomic uncertainty has translated into greater demand for gold, with spot prices increasing from $1,250 per ounce at the end of last year to around $1,500 today. Barrick’s share price – as tends to happen with gold miners – has risen even more rapidly, up more than 45% over the period to a recent $19.30.
While Malan has updated one key assumption on Barrick, his theses around gold and the company’s prospects remain fully intact. “When you draw out the time frame to what we actually use, we consider the increase in the gold price and in gold equities as really pretty marginal,” he says. “We’re seeing excess in equity markets, in bond markets and in obscure assets like bitcoin, and the outcome of excess at some point is that people flock to safe-haven assets like gold. That prices have moved a bit in the short term has had zero influence on our conviction in the investment case.”
If anything, he says his confidence level in Barrick’s prospects has increased. Under CEO Mark Bristow, who had run Randgold prior to the merger, and Chairman John Thornton, the company has reduced the size of its board, decentralized top management and put priority on selling off higher-cost, non-core assets. Its joint venture with rival Newmont Mining, announced in March, combines each firm’s extensive Nevada mining operations and is an example, Malan says, of the new-found emphasis he believes top industry players are placing on supply discipline and cost efficiency.
In updating what he considers his “realistic” upside case for Barrick’s stock, he continues to assume a $1,700 gold price, 45% margins from earnings before interest and taxes, and a 20x exit price/earnings multiple. He has, however, taken his annual production-growth estimate for the company down from 6% to zero, which he considers a conservative reflection of the age of some legacy Barrick mines and the company’s welcome move to pare high-cost assets. With those assumptions, the company's share price five years out would roughly double from today’s level.
In his “wildly optimistic” case, if gold hit $3,000 per ounce, EBIT margins rose to 50% and the exit multiple hit 30x – where the stock has traded in the past – Barrick’s share price would exceed $100. “Unfortunately, geopolitical risks, equity and bond overvaluation, overall debt leverage and the level of short-termism exhibited by market participants has only increased,” he says. “We think it is still early days in this thesis.”