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TICKERS: ABX; GOLD, NEM

Take It from Berkshire Hathaway—It's Still Time to Buy Major Gold Miners
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Matt Badiali Independent financial analyst Matt Badiali discusses Warren Buffett's recent move.

The biggest news in gold mining, after the record price, is Warren Buffett's Berkshire Hathaway recent disclosure. They informed the world that they invested in Barrick Gold Corp. (ABX:TSX; GOLD:NYSE).

That sent financial twitter ablaze, because Buffett is a famous gold hater. He famously said in 1998:

"(Gold) gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

However, even Warren Buffett understands the impact of higher gold prices on gold miners. That's why he bought Barrick.It's not like he bought a ton of metal…he bought 20.9 million shares (1.2% of the company's stock). It's a $565 million bet on Barrick's profits going stratospheric on these higher gold prices.

While that's good news, the recent ding in the gold price took Barrick's shares down. You can see what I mean in the chart below:

Barrick Gold

That sell off is an opportunity for investors to follow Berkshire's lead.

It only takes a minute to understand Berkshire's attraction to Barrick Gold—it's the same reason I recommended the stock to my readers in July 2019. The company is profitable. Just look at this table:

2018

2019

2020*

2021*

Revenue

$7.2 billion

$9.7 billion

$12.1 billion

$12.8 billion

Cash from Ops

$1.8 billion

$2.8 billion

$4.3 billion

$5.0 billion

Free Cash Flow

$365 million

$1.1 billion

$1.9 billion

$3.1 billion

Gold Price (realized)

$1,267 per oz

$1,396 per oz

$1.657 per oz**

-

EV to FCF***

60 times

39 times

31 times

-

Data from Bloomberg; *Bloomberg Estimate; **2020 Average through June 30. ***At Year End

The valuations just keep looking better. I used enterprise value (EV) because it takes debt into account compared to free cash flow (FCF). What we see is that even though Barrick's EV more than doubled since 2018, its valuation fell by half.

That's because of the profit it can make on the higher gold price. It generated a modest $365 million in free cash flow in 2018 when it earned just $1,267 per gold ounce. If we get a full year of the gold price at $1,900 per ounce, Barrick will be hugely profitable.

Based on Bloomberg's 2021 estimate, if you bought Barrick today, you are paying just 19 times enterprise value. It's closest competitor, Newmont Corp. (NEM:NYSE) trades even lower, at just 16 times 2021 free cash flow.

This is a fantastic point to add to our positions in the major gold miners. The ones that are profitable at lower prices will do very well at these much higher gold prices.

Regards,

Matt Badiali

Matt Badiali is a geologist and independent financial analyst. He spent fifteen years researching and writing about great investments inside the natural resources sectors. He can be reached at www.mattbadiali.net.

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Streetwise Reports Disclosure:
1) Matt Badiali: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: None. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. I determined which companies would be included in this article based on my research and understanding of the sector.
2) The following companies mentioned in the article are sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
3) Statements and opinions expressed are the opinions of the author and not of Streetwise Reports or its officers. The author is wholly responsible for the validity of the statements. The author was not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article. Streetwise Reports requires contributing authors to disclose any shareholdings in, or economic relationships with, companies that they write about. Streetwise Reports relies upon the authors to accurately provide this information and Streetwise Reports has no means of verifying its accuracy.
4) The article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Newmont Corp., a company mentioned in this article.




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