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Investment Overview for Barrick Gold (NYSE:ABX)
Gold prices declined on average from 2011-2015. This trend prompted Barrick Gold to rationalize its portfolio of mines, in response to the subdued pricing environment. Though gold prices recovered in 2016, growth is expected to remain sluggish in the near term.
- Recovery in gold prices in 2016, subdued growth going forward
- 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. Macroeconomic uncertainty caused by the unexpected outcome of the UK's June 2016 EU referendum drove prices higher in 2016. Though prices recovered in 2016, strengthening economic conditions and low levels of unemployment in the U.S. have set the stage for the Fed to raise interest rates, with three 25 basis point rate hikes expected in 2017 (including the March rate hike). This is expected to translate into a decline in the investment demand for gold, which will limit the upside for gold prices in the near term.
- 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, $831 per ounce and $730 per ounce in 2014, 2015 and 2016 respectively. 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 86 million ounces at the end of 2016.
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 2021, and boosts the division's growth in shipments by an additional 1000 basis points from 2021 onwards with a 400 basis point addition to margins, it would represent a 4% upside to our price estimate.
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 $1,300 per ounce by the end of the forecast period as opposed to around the $1,355 per ounce currently factored in and margins decline by 150 basis points, it would represent a downside of around 8% to our current price 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 86 million ounces and 5.9 billion pounds, respectively, at the end of 2016. Barrick produced 5.52 million ounces of gold and 415 million pounds of copper in 2016.
Gold as the primary source of revenue
Gold mining is the most important division for Barrick Gold in terms of revenues and profits. In 2016, the company sold 5.50 million ounces of gold at an average realized price of $1,248 per ounce. It generated around $7.91 billion in revenues from the sale of gold and $0.47 billion from copper sales in 2016.
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. 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.
Recovery in global demand and prices for copper
The global demand outlook for copper and the prices of the metal have risen in recent months. China, the world's largest consumer of copper, is expected to witness a decline in GDP growth to 6.5% and 6.0% in 2017 and 2018 respectively from 6.7% in 2016. In response to declining growth, the Chinese government has instituted a fiscal stimulus targeting the infrastructure and manufacturing sectors. This has boosted the demand outlook for copper from China. In addition, President Trump's plans for a $1 trillion revamp of U.S. infrastructure has raised the demand outlook for copper from the U.S. This has led to a recovery in prices of copper in 2017.
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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