The Impact Of Copper Supply Side Constraints On Barrick Gold’s Stock Price


Barrick Gold Corporation (NYSE:ABX) is one of the world’s largest producers of gold. In addition to gold, the company is also involved in copper mining, with sales of copper accounting for around 12% of the company’s overall revenues. [1] Barrick’s copper production is set to rise significantly with the commencement of production from the company’s Jabal Sayid mine in Saudi Arabia in 2016. [2] With the company increasing its exposure to copper, the future trajectory of copper prices will play a greater role in determining the fortunes of the company. Copper prices fell quite considerably over the course of the last year, with London Metal Exchange (LME) copper prices averaging roughly $5,800 per ton in Q1 2015, as compared to approximately $7,100 per ton in Q1 2014. [3] The decline in copper prices over the last year was mainly due to concerns over copper demand from China, due to recent signs of economic sluggishness. China is the world’s largest consumer of copper, accounting for nearly 40% of the world’s demand for copper. [4]

However, after falling to levels of $5,400 per ton in January, LME prices have recovered somewhat, and currently stand at levels of $5,900 per ton. [3] Prices have been bolstered by improving economic conditions in the developed world, particularly in the U.S., and to a lesser extent, in Europe and Japan. [5] Another factor that has contributed to the recovery in copper prices are supply side constraints, with several companies abandoning or deferring new projects, which has raised expectations of future copper prices. In this article, we will take a look at what impact this could have on Barrick Gold’s stock price.

Impact of Supply Side Constraints on Barrick’s Stock Price  

Copper Prices

(Copper Prices, Source: London Metal Exchange)

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Copper prices have been boosted by expectations of the tightening of copper supply. [6] As a result of the prevailing weakness in prices over the course of the last year, large copper mining companies have put on hold several new projects. In addition, given the adverse pricing environment, funding has become hard to come by, especially for smaller copper mining companies. [6] Furthermore, declining ore grades have negatively impacted copper output for many copper miners globally. [6] As a result of these supply side constraints, copper output is expected to decline in the future, which is likely to translate into a more favorable demand-supply equation. However, the exact impact of these supply side constraints on the demand-supply equation remains to be seen. As per estimates by Citi, demand for copper will exceed supply by 61,000 tons by 2016. [6] Though this represents less than 1% of global production, the extent of this supply shortage could increase going forward, particularly if global economic growth recovers faster than expected. [7] This would boost copper prices and the prospects of copper producers such as Barrick Gold.

In order to model this scenario, we will assume that realized copper prices for Barrick’s copper mining division rise by around 10% by the end of our forecast period. This would correspondingly boost margins for the company’s copper mining division. In addition, we will assume that the company’s production plans and capital expenditure remain the same in this alternative scenario. Since we forecast capital expenditure as a percentage of EBITDA, in order to model this new scenario we have modified our forecasts in order to keep capital expenditure at the same absolute levels in the alternative scenario. If we factor in these assumptions on the various drivers impacted in our stock price model, our price estimate for Barrick Gold increases by about 10% from $11.97 to $13.13. Thus, there is potential for an upward revision in valuation for Barrick Gold in case supply side constraints boost copper prices.

See our complete analysis for this scenario

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Notes:
  1. Barrick Gold’s 2014 40-F, SEC []
  2. Barrick Completes Joint Venture Agreement With Ma’aden for Jabal Sayid, Barrick Gold News Release []
  3. LME Copper Prices, LME [] []
  4. Copper Ends at 5-Month Low on China Worries, Wall Street Journal []
  5. Copper Rebound Seen by Barclays as Miners Struggle on Output, Bloomberg []
  6. Copper producers position for price recovery, Financial Times [] [] [] []
  7. Global Copper Production, U.S. Geological Survey []