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Investment Overview for Barrick Gold (NYSE:ABX)
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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:
North American Mines
- Barrick's North American Gold Shipments:
Global economic instability usually results in a jump in gold prices as investors look for safe investment options. We expect gold demand and prices to remain buoyant in the near-term due to mounting concerns related to the Eurozone and other macroeconomic factors. We expect gold prices to reach $1,770 through the end of the forecast period. However, if gold prices manage to exceed our expectations and reach $2,000, this could translate to an upside of more than 7% to our current price estimate. However if improving economic conditions pressure gold prices and they decline to $1,550, this could translate into downside of more than 9% to our price estimate.
North American Mines
- Barrick's North American Gold EBITDA Margin: Barrick's margins from its North American operations increased from 30% in 2008 to 67% in 2011 as the sharp rise in gold prices offset significantly higher cost of sales. We expect margins to decline to below 65% by the end of the Trefis forecast period. However, if gold demand remains strong and the company is able to cap its production costs, the North American margins could increase to 70% by the end of the Trefis forecast period. This would represent an upside of nearly 5% to the Trefis price estimate. Should energy and labor costs continue to increase without a corresponding increase in gold prices, margins could fall to 60% by the end of our forecast period, resulting in a downside of 5% to the Trefis price estimate.
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Barrick Gold Corporation (NYSE:ABX) is the world's largest pure 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 copper is produced from the South American mines. New mining and exploration projects in Papua New Guinea, the U.S., Canada, Australia, Peru, Chile, Russia, South Africa, Argentina and Tanzania are being undertaken by the company to expand its production.
Traditionally, Barrick Gold has been conservative in its approach towards gold pricing. For years, it has followed a strategy of hedging gold. This had given it considerable advantages in the past. During the last two years, Gold prices rose considerably as investors flocked to gold during the uncertain economic times that prevailed globally. High prices and the continued belief that gold prices will appreciate in the near future have enabled the firm to remove its hedges in order to improve profits.
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Gold as the primary source of revenue
Gold mining is the most important division for Barrick Gold in terms of revenues and profits. In 2011, the company sold 7.7 million ounces of gold at an average realized price of $1578 per ounce. It generated over $12 billion in revenues from the sale of gold, $1.7 billion from copper sales and $177 million from its energy operations.
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Barrick Gold could enjoy greater upside than ETFs
Barrick Gold's revenues and profits are directly impacted by the spot market price of gold. The performance of a gold ETF is also dependent primarily on the gold prices in the open market. The leverage that is created by extracting gold at a much lower cost and selling it at the market price provide mining firms like Barrick Gold a strong opportunity to increase value for shareholders.
Reserves and Resources
Barrick Gold has an extensive geographical presence, with 26 operating mines located across five continents. The company has the largest proven ore reserves in the industry with nearly 140 million ounces of gold, over 1 billion ounces of silver contained within gold reserves and 12.7 billion pounds of copper as of 2011.
Efficiency
Barrick Gold is one of the most efficient producers of gold. In 2011, it produced 7.7 million ounces of gold at a cash cost of $460 per ounce. This places it at the bottom three in the global cost curve for gold production.
Acquisitions and Expansion
Barrick Gold has a number of acquisition opportunities potentially available. This includes the remaining 25% stake in Cerro Castle and a 50% stake in Round Mountain.
Barrick Gold also has projects lined up to extend the life cycle of its aging mines by setting up facilities for mining and production from lower grade gold ore.
Gold as an asset class
The economic turmoil of 2008 and 2009 shifted the focus of investors to safer investment vehicles like gold, which is perceived to be a good investment during times of economic upheaval. Gold ETFs and mutual funds, which are heavily weighted toward gold, are becoming increasingly popular.
Gold as a hedge against inflation
In the past gold prices have trended well with rising inflation. The massive monetary easing that occurred during the financial crisis of 2008/2009 is expected to spur inflation down the road. This has encouraged central banks to add to their gold reserves as a means to avoid currency devaluation. Further, the U.S. Fed's decision to keep interest rates at near zero levels may also lend support to gold.
Industrial copper demand in emerging markets
Many global manufacturers had been setting up facilities in developing countries like India, Thailand, China and South Korea primarily due to lower labor costs and in anticipation of growing demand in the region.
Surplus copper supply
Copper supply had previously struggled to meet demand,as copper mine output had lagged due to various factors such as strikes and weak recoveries. This had caused prices to shoot up and spurred additional investments. Recent global economic sentiments have turned adverse. Therefore, a supply glut is now expected going forward and as worldwide production goes up, prices are expected to keep low.
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.
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