Why Barrick Gold Won While Freeport-McMoRan Lost?

by Trefis Team
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Freeport-McMoRan Inc.
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Freeport-McMoRan’s stock (NYSE: FCX) is down 12% so far in 2020. But wait a minute, close rival Barrick Gold stock (NYSE: GOLD) has increased 45% in 2020 so far.  If we compare the stock price trends for these mining giants over recent years, we can see that FCX’s stock price has declined 37% from $19 at the end of 2017 to almost $12 as of 30th June 2020. What is interesting to note is that Barrick Gold’s stock price increased significantly by 86% during the same period. So, despite both companies dealing in similar products – gold and copper – what has helped Barrick Gold achieve a much superior stock performance vis-à-vis FCX?  It is the revenue and margin growth along with revenue mix for these companies. Our dashboard Freeport-McMoRan vs. Barrick Gold: Does The Stock Price Movement Make Sense? has the underlying numbers.

Barrick Gold revenues increased by 16% from $8.4 billion in 2017 to $9.7 billion in 2019, which compares favorably with Freeport-McMoRan’s revenues which decreased 12.2% during the same period. GOLD’s revenue rise was primarily driven by higher production and shipments, benefiting from the acquisition of Randgold Resources in January 2019, while FCX’s revenue decline has been a reflection of negligible gold and copper output from its Indonesian operations on account of the ongoing 2-year transition of the Grasberg mine from an open pit to underground mine. Though Freeport-McMoRan’s net income margin had been significantly higher than Barrick’s in 2018, due to better quality grades and higher revenue (and with Barrick reporting huge impairment cost in 2018), Barrick Gold’s margin increased sharply from -19.8% in 2018 to 47.1% in 2019 due to the one-time impairment reversal on account of remeasurement of the fair value of certain assets. In contrast, FCX reported losses with a margin of -1.7% in 2019 due to a sharp drop in shipments. The P/E multiple of both companies is not comparable due to negative earnings reported by FCX in 2019.

How Do Businesses Of Freeport-McMoRan & Barrick Gold Compare?

Let’s have a closer look at the core business prospects. Barrick Gold’s operations include gold and copper mining. FCX’s operations include mining of gold, copper, molybdenum, and cobalt. Despite almost similar products, what’s striking is the revenue mix of these two companies.

Barrick Gold’s revenues are deeply concentrated with gold, with the yellow metal contributing almost 95% of the total revenues in 2019. With the acquisition of Randgold Resources and the Nevada JV (with Newmont), this contribution is likely to go up to 96% in 2020. In comparison, FCX got only about 10% of its total revenue from gold, which is expected to be about 13% in 2020. A slowdown in economic and industrial activities and expectations of a global recession following the outbreak of coronavirus this year has increased gold’s value as a hedging instrument. Global gold prices have increased from about $1,500/ounce at the beginning of 2020 to almost $1,780/ounce currently due to higher demand. With rising investment in the yellow metal by major central banks and expectations of interest rates heading south, gold prices already saw a sharp rise in 2019. This trend was further boosted by the current Covid-19 crisis.

Freeport-McMoRan’s revenues are mostly concentrated in copper, which made up 62% of FCX’s revenues in 2019. In contrast to gold, the effect of the current crisis has been completely opposite on copper prices, which declined from $2.80/pound at the beginning of 2020 to $2.10/pound in March 2020, before recovering to over $2.50/pound currently, which is still lower than the pre-Covid price. This drop was mainly due to expectations of lower demand from automobile and construction players as the economic activity slows down.  Thus, the current crisis has, in fact, helped Barrick Gold due to most of its revenue coming from gold, while FCX seems to have lagged as it is not able to take advantage of the surge in gold prices with all of its gold output coming from Grasberg, which is currently undergoing a transition, while copper revenue is also declining.

If there are no signs of abatement of the coronavirus crisis during Q3 2020, Freeport-McMoRan’s stock could see a sharp drop from its current level. Though Trefis has a fair price estimate of $12 per share for FCX’s stock, our worst-case scenario shows that FCX’s stock could drop to $4. On the contrary, Barrick Gold’s valuation works out to $25, slightly below its current price.

While Barrick Gold’s stock has performed better than FCX, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

For further insight into the mining space, see how rivals Newmont and Freeport-McMoRan compare with each other.

 

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