Newmont-Goldcorp Or Barrick Gold – Who Is Winning The Gold War?

With the outlook for gold price being positive (the recent interest rate cut by Fed, which was the second cut of 2019, has reaffirmed this outlook), and with the sector witnessing major deals and consolidation this year, it would be interesting to see how the top 2 gold mining companies – Newmont Goldcorp (NYSE: NEM) and Barrick Gold (NYSE: GOLD) stack up against each other.

You can view the Trefis interactive dashboard – Newmont Mining vs Barrick Gold: Comparative Analysis – to understand the key metrics for the two gold giants. In addition, here is more Materials data.

Newmont’s Emergence As Revenue Leader

• Though Barrick has historically reported much higher revenues compared to Newmont, the trend has reversed in recent years with NEM taking over in 2018.
• Barrick’s revenue dropped by $1.8 billion from 2015 to 2018, mainly due to faster exhaustion of its reserve base which led to lower production and shipments of gold and copper, while Newmont gained $1.2 billion during the same period, mainly due to higher gold revenues, partially offset by lower copper sales.
• In 2018, Newmont’s revenues were $0.1 billion higher than Barrick.
• This lead is expected to widen to $0.6 billion in 2019, with both companies expected to see a rise in revenue (though NEM would grow at a faster rate) mainly benefiting from the 2 mega-mergers (Newmont Mining & Goldcorp; and Barrick Gold & Randgold Resources) of 2019.

A] GOLD

a) Revenue

• Barrick’s gold revenues were higher than Newmont until 2017 due to better price realization and higher shipments in most of the years.
• However, in 2018, NEM’s gold revenues were $0.4 billion higher than Barrick due to higher shipments, partially ofset by lower price realization.
• Increased volume and better grades attributable due to the Goldcorp merger is expected to help Newmont increase its gold revenue lead over Barrick to $0.9 billion in 2019.

b) Production

• Barrick has seen a continuous drop in gold production from 6.1 million ounces in 2015 to 4.5 million ounces in 2018, marking a decline of 1.6 million ounces in three years.
• During the same period, Newmont successfully increased its production capacity, with gold production increasing by a net of 0.5 million ounces, from 5 million in 2015 to 5.5 million in 2018.
• NEM surpassed Barrick in 2017 and its gold production levels have been higher since then, mainly due to higher reserve base (65.4 million ounces v/s 62.3 million).
• Though both companies are expected to see a rise in gold production in 2019, mainly due to major acquisitions during the year, NEM would likely maintain its lead over Barrick.

c) Shipments

• Similar to production trends, Newmont has largely seen an increase in gold shipments over the years, whereas Barrick has witnessed a significant drop.
• Though Barrick has some high-quality gold mines in the Nevada region (U.S.), low grade quality in Africa has hampered volume growth.
• Newmont-Goldcorp and Barrick-Randgold deals are expected to drive volume growth in 2019.

d) Price Realization

• Gold price realization has moved in tandem with global gold price levels.
• However, Barrick has been able to realize a better price for its output, compared to Newmont.
• This was mainly due to higher grade output in the US and successful hedging strategies.
• Newmont adopts a zero-hedging strategy, i.e. all of its gold output is sold at market price.

B] COPPER

a) Revenue

• Barrick’s copper revenue saw a sharp decline in 2016 due to significant drop in production and shipments, driven by divestment of 50% of its ownership in the Zalvidar mine.
• However, Barrick’s copper revenues have consistently been much higher than Newmont’s, mainly due to significantly higher production and shipments, along with better price realization.
• Though segment revenue is expected to improve for both companies, Barrick is likely to maintain its lead over NEM in the near term.

b) Production

• Copper production has been declining for both the companies over recent years (though Barrick saw a sharp drop in 2016 due to divestment at Zalvidar mine), mainly due to operational issues, crusher availability problems, and grade quality.
• However, Barrick’s copper production has been consistently higher than Newmont’s, with it being 3.5x that of NEM’s production in 2018.
• This is mainly due to Barrick having a much larger copper reserve base.
• As of 2018, Barrick’s copper reserves were 10.6 billion pounds as against 2.9 billion pounds for Newmont.

c) Shipments

• In line with production trends, both companies have seen a reduction in copper shipments.
• Barrick’s copper shipments are significantly higher than NEM’s.
• Both companies are expected to see a reversal in trends in 2019, with production and shipments increasing with improving grades and key mines.

d) Price Realization

• Similar to gold prices, copper price realization also moves in tandem with global price levels for both companies.
• However, Barrick has enjoyed an advantage due to its successful hedging strategies, whereas NEM sells all of its output at market prices, which exposes it to higher market risk.

C] Profitability

• Both companies have seen a lot of volatility in profitability over recent years, mainly due to fluctuation in global commodity price trends, a volatile industry, and frequent and significant impairment charges.
• However, assuming similar impairment cost, Barrick could be at a greater advantage following the NEM-GOLD Nevada JV, especially due to its higher-grade assets in Nevada being further benefited by use of NEM’s superior and low-cost processing infrastructure in the region.
• Barrick’s margin (8%) is expected to be higher than NEM’s (5%) in 2019.

D] Conclusion

• Though both companies face stiff competition from each other and other players, Newmont is expected to be the larger entity in terms of revenues and production.
• However, Barrick is likely to be more profitable in the near term.

As per Newmont-Goldcorp Valuation by Trefis, we have a price estimate of $44 per share for NEM’s stock. As per Barrick Gold Valuation by Trefis, we have a price estimate of $19 per share for Barrick’s stock.

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