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Investment Overview for Barrick Gold (NYSE:ABX)
WHAT HAS CHANGED
Gold prices have been declining on average over the past few years. This trend continued over the course of the last year, which prompted Barrick Gold to rationalize its portfolio of mines in response to the subdued pricing environment.
- Declining gold prices
- Gold prices have fallen over the course of the last year, reacting to cues pertaining to the tapering of the Federal Reserve's Quantitative Easing (QE) program and expectations of an interest rate hike by the Fed. Gold as an investment is often viewed as a hedge against inflation and economic weakness. Strengthening U.S. economic growth stoked fears of an interest rate hike by the Fed, which reduced the investment demand for gold and led to a fall in prices of the metal. However, with the Fed keeping interest rates unchanged in its September meeting, gold prices have recovered somewhat. An interest rate hike by the Fed is contingent upon the pace of economic growth, jobs growth, and inflation in the U.S., as well as the pace of global economic growth.
- London PM Fix gold prices averaged $1,411 per ounce in 2013, falling to $1,266 per ounce in 2014 and averaged less than $1,200 per ounce in the first ten months of 2015.
- Divestment of non-core assets and rationalization of operating costs
- Barrick Gold has rationalized its business in response to the subdued gold pricing environment. It has divested several high cost gold mines over the course of 2014, as well as tried to reduce its operating costs. This is reflected in the company's all-in sustaining costs (AISC) metric, which is a measure of the overall costs required to sustain a company's current mining operations. The AISC for Barrick's gold mining operations fell from $915 per ounce in 2013, to $864 per ounce in 2014. The impact of the divestment of high cost mines was also reflected in the company's proven and probable reserve base, which fell from 104 million ounces at the end of 2013, to 93 million ounces at the end of 2014.
Below are key drivers of Barrick Gold's value that present opportunities for upside or downside to the Trefis price estimate for the company's stock:
Cortez Mine, Nevada
- Cortez Mine Gold Shipments:
Gold shipments from the Cortez mine declined sharply in 2014 due to a decline in ore grades being mined. The company is conducting feasibility studies for the expansion of the Cortez Hills Lower Zone. If this expansion materializes, shipments from the Cortez mine may rebound to previous levels. Such an eventuality will also boost margins for the division. This scenario represents an upside of around 12% to our price estimate.
Cortez Mine, Nevada
- Cortez Mine realized price per ounce: The realized price per ounce for the Cortez mine decreased in 2014 due to an improvement in global economic conditions and a fall in the investment demand for gold. The demand for gold going forward will be driven by the jewelry demand for gold, particularly from Asia. The jewelry demand for gold depends upon the pace of economic growth. Currently, we expect the gold price to grow around 2% per year over the forecast period. However, if global economic conditions improve faster than expected, there could be a greater increase in realized prices, which will impact all gold mining divisions of the company. This represents an upside of around 10% to our price estimate.
Barrick Gold Corporation (NYSE:ABX) is the world's largest gold mining company and is headquartered in Toronto. The firm operates primarily in four regions - North America, South America, Australia Pacific, and Africa. All four regions produce gold, and produce copper in South America and Africa.
The company's total gold and copper reserves stood at 93 million ounces and 9.6 billion pounds, respectively, at the end of 2014. Barrick produced 6.25 million ounces of gold and 436 million pounds of copper in 2014.
Gold as the primary source of revenue
Gold mining is the most important division for Barrick Gold in terms of revenues and profits. In 2014, the company sold 6.3 million ounces of gold at an average realized price of $1,265 per ounce. It generated over $8.7 billion in revenues from the sale of gold, $1.2 billion from copper sales, and $271 million from other operations.
Rising demand for gold from emerging economies
Demand for gold is expected to be quite robust from major emerging economies. Rapidly growing middle class populations and rising incomes in these countries, particularly China and India -- the world's largest gold consumers -- are expected to result in a sustained jewelry and investment demand for gold. For example, private sector demand for gold in China is expected to rise from 1,132 tons in 2014 to at least 1,350 tons by 2017.
Weak global demand for copper
China is the largest consumer of copper in the world, accounting for nearly 40% of the total world consumption of copper. China's GDP growth is expected to slow to 6.8% and 6.3%, in 2015 and 2016, respectively, from 7.4% in 2014. Slower economic growth in China has led to a moderation in demand for copper. Further, the proposed structural transformation of the Chinese economy from an investment and export led growth model, to a consumption led growth model, may negatively impact Chinese demand for copper in the long run. Weak Chinese demand for copper will put pressure on copper prices.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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