Barrick Has Dipped on Gold Prices But a Recovery Brings $59 in Sight

Although Barrick Gold Corporation (NYSE:ABX) has slumped in September and October, we believe that the company’s fundamentals are strong and profitability will remain high, especially if the price of gold recovers. Headquartered in Toronto, Barrick is the world’s largest gold mining company. It competes with other mining companies such as Newmont Mining (NYSE:NEM), AngloGold Ashanti Ltd. (NYSE:AU), Goldcorp Inc. (NYSE:GG) and Freeport McMoran Copper(NYSE:FCX).

Our $59 price estimate for Barrick Gold is roughly 20% above the market price.

See our full analysis for Barrick

Stock Slumps as the Price of Gold Falls

In second half of September, gold touched an all time high of close to $1,950 in the spot markets with the rising debt crisis driving investors towards precious metals. However, signs that the European Union may formulate a bail-out plan and fears of a global economic slowdown led to some deleveraging among financial market participants that eventually contributed to a decline in the gold price. Moreover, the U.S. Dollar gained strength relative to other economies, adding further pressure to the gold price as investors shifted to Dollars pushing gold down to near the $1,600 level.

The lower gold price resulted in a hit to the margins of gold miners as this will weigh on profit margins. Since then, the gold price has recovered slightly and we believe that the company’s margins will remain robust.

Catalysts Supporting a Recovery in Gold

1) Holiday seasons will drive profits

Gold previously peaked during the economic crisis in 1970. Adjusted for inflation, the peak price in the 70s would equal $2400 per ounce. While we don’t believe that the price will reach those levels, there is still some upside. India, the top consumer of gold, is likely to see strong demand in the coming month as the holiday the Indian new year falls at the end of October.

There is historically significant demand for gold during the month which could help support higher prices. Historically, demand for gold is strongest between September and February of the following year in part due to holiday-driven demand.

2) Debt crisis will drive investor interest in gold

During times of economic crisis with uncertainty in the equity markets and many developed economies undertaking policies that will devalue their currencies, global investors will many times invest their money in safe precious metals like gold. This has been the primary driver for gold over the past few years considering that the metal has very few industrial applications. The global economy has slowed down primarily due to sovereign debt concerns, and we expect that this lack of investor confidence could also drive demand for gold.

In addition to this, the governments of China, India and other developing nations are looking to increase their gold reserves as a hedge to the falling US Dollar. Major institutional investors in the U.S. are doing this as well as hedge and long term investment given the high economic uncertainty right now.

We believe that despite gold’s recent drop, it will very likely recover in light of a poor fundamental environment. We are bullish on the company’s prospects and believe that the $59 price estimate is justified.

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