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Investment Overview for Barrick Gold (NYSE:ABX)
WHAT HAS CHANGED?
Gold prices have declined on average over the past few years. This trend prompted Newmont Mining to rationalize its portfolio of mines in response to the subdued pricing environment. However, prices have recovered this year amidst global economic uncertainty.
- Recovery in gold prices
- Gold prices fell over the course of 2015, driven by 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. The Fed raised interest rates by 25 basis points in December 2015. However, statements made by the Fed post its First rate hike in many years indicate that the Fed's interest rate tightening cycle would be more gradual than previously anticipated, largely due to weakness in global economic growth. A more moderate Fed stance pertaining to interest rate hikes has boosted gold prices. London PM Fix gold prices, which averaged $1,160 per ounce in 2015, averaged roughly $1,180 per ounce in Q1 2016.
- 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 the past couple of years, 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, and further to $831 per ounce in 2015. 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 91.9 million ounces at the end of 2015.
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:
The company is currently working on expanding underground mining operations at the Cortez mine. If the expansion is completed by 2018, and boosts the division's growth in shipments by an additional 500 basis points from 2019 onward, it would represent a 3% upside to our stock price.
Cortez Mine, Nevada
- Cortez Mine realized price per ounce: Gold prices have recovered in 2016 due to expectations of a moderated Fed interest rate increase cycle, as a result of global economic uncertainty. However, if there is an improvement in global economic conditions and the Fed tightens interest rates faster than expected, gold prices would rise at a slower rate. In such a scenario if realized prices rise to $1,320 per ounce by the end of the forecast period as opposed to around the $1,370 per ounce currently factored in, it would represent a downside of around 5% to our current 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 91.9 million ounces and 11.7 billion pounds, respectively, at the end of 2015. Barrick produced 6.12 million ounces of gold and 511 million pounds of copper in 2015.
Gold as the primary source of revenue
Gold mining is the most important division for Barrick Gold in terms of revenues and profits. In 2015, the company sold 6.08 million ounces of gold at an average realized price of $1,157 per ounce. It generated around $8 billion in revenues from the sale of gold and $1.03 billion from copper sales in 2015.
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. The Chinese middle class population is expected to grow by over 60%, or 200 million, to 500 million in six years time. 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 6.3% and 6.0%, in 2016 and 2017, respectively, from 6.9% in 2015. Slower economic growth in China has led to a moderation in demand for copper. Further, the ongoing 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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