Headquartered in Toronto, Ontario Barrick Gold Corporation (NYSE:ABX) is the world’s largest pure gold miner. It operates mines in North America, South America, Australia and Africa. The company competes with other mining companies such as Newmont Mining (NYSE:NEM), Goldcorp Inc. (NYSE:GG) and Freeport McMoran Copper (NYSE:FCX).
As evident from chart below, the company derives more than 90% of its value from gold, making it highly vulnerable to gold prices. Gold, popularly know as risk haven, has rallied substantially in the past few years, with the price per ounce of gold trebling from just about $600 in 2007 to more than $1,900 in 2011.  But of-late, it is well below $1,700 per ounce price tag, that we anticipate gold price to average for 2012. Many are expecting gold to even touch $2,000 per ounce.
This prompts us to take a look at potential upside/ downside to our $53 stock price estimate for Barrick Gold.
Here, we highlight 2 of the most important drivers for Barrick’s stock and the upside/downside potential.
1. North America Mines Gold Price Per Ounce: Barrick’s North America mines have realized an average of $1,580 for each ounce of gold sold in 2011.
2. North American Mines EBITDA Margin: The North America mines’ EBITDA margins soared to 66.8% in 2011 on back of higher prices.
~15% Upside Scenario | $59 Trefis Price Estimate
1. Higher Gold Prices for North America Mines (+7%):
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 about Euro Zone future coupled with other macroeconomic factors.
We expect gold prices to reach $1,770 through the end of the forecast period. But, if gold prices manage to exceed our expectations to appreciate significantly to reach $2,00o, this could translate to an upside of more than 7% to our current price estimate of $53.
2. North American Margins Improve (+5%):
Nowadays miners are grappling with rising input including fuel and labor costs. Any miner’s margins are largely affected by the prices of commodity if the mine is already running close to its production capacity. After a significant rise in margins on the back of higher gold prices, we expect margins to remain under pressure to reach 64% by the end of Trefis forecast period.
However, if Barrick Gold could manage to control costs to boost its margins to 70% by the end of the Trefis forecast period, this will represent a 4% upside to the Trefis price estimate.
~15% Downside Scenario: $47 Trefis Price Estimate
1. Lower Gold Prices for North America Mines(-9%):
Of-late, gold prices are hovering at $1,550 per ounce due to strengthening of the U.S. dollar trading well below $1,600 per ounce. Even if gold prices don’t decline any more and remain at current price of $1,550, this could translate into downside of more than 9% to our current price estimate of $53.
2. North American Margins Decline Further (-4%):
Barrick’s North America mine division’s EBITDA margins were well below 60% prior to 2010. A significant increase in prices in 2010 and 2011 pushed EBITDA margins to 66.8% levels.
Going forward, soaring cash costs will keep margins in check. However, if the margins decline more than we anticipate to about 60% levels, it represents a 4% downside to our current price estimate of $53.Notes: