How Sensitive is Barrick’s Share Price to its Copper Margins?

by Trefis Team
-19.49%
Downside
13.88
Market
11.17
Trefis
ABX
Barrick Gold
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Barrick Gold is the largest gold mining company, which also produces a sizeable quantity of copper as part of its mining operations. With the increasing global demand for copper due to its favorable business prospects, we try to interpret the impact of an increase in Barrick’s copper EBITDA margin on the company’s valuation.

Barrick’s copper mines contribute an average of 11% to its total revenue. With rising copper prices, we anticipate this share to rise in the upcoming years. Copper prices surged by approximately 28% in 2017 largely as a result of China’s structural changes and an enhanced outlook for copper with the increasing consumer substitution to Electric Vehicles (EVs). Barrick’s EBITDA margin from its copper operations ranged from 22%- 37% historically per our estimates. The variation was largely driven by a fall in the company’s copper revenue as a resultant impact of the commodity downturn experienced recently.

The graph below highlights the implications of a 1% change in the company’s copper EBITDA margin, details of which are elaborated in our model. Per our analysis, we derive that a 1% improvement in the company’s EBITDA margin in its copper mining operations results in a mere .11% upside to the current market price of the company. This implication seems reasonable given that copper remains a minor part of Barrick’s operations. The earnings and P/E multiples are based on our projected results for 2018 and the model assumes that the forward P/E for the company remains constant.

In case you have alternate assumptions contrary to our assumed revenue, EBITDA margin, or net income margin estimates, you can modify the same using our interactive platform to arrive at your own impact on the company’s valuation.

We have $15 price estimate for Barrick Gold, which is 8% above the market.

Have more questions about Barrick Gold? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking and encourages readers to comment and ask questions in the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Barrick Gold

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