How Is Barrick Gold’s Over Reliance On The Yellow Metal Helping It?

Barrick Gold’s stock (NYSE: GOLD) has increased a large 133% in the last one year, from $12 in May 2019 to $28 as of 19^th May 2020. Such a sharp rise in the stock price is mainly attributed to the company’s gold division which added $2.6 billion in incremental revenues in 2019 on account of additional mines in the portfolio due to the merger with mining giant Randgold Resources in early 2019, along with higher gold prices. In the absence of any impact of inorganic growth, gold revenue is expected to increase by about 10% ($0.9 billion) to $10.2 billion in 2020, mainly due to higher gold price realization.

The spread of coronavirus, which has led to a lock down in almost all major cities across the globe, is proving to be a boon for major gold miners like Barrick Gold. Expectation of a sharp decline in economic and industrial activity has fueled safe-haven investment demand for gold, offsetting marked weakness in consumer-focused sectors of the market, in turn leading to a surge in gold prices. Global gold prices have increased from about $1,500/ounce at the beginning of 2020 to almost $1,745/ounce in May 2020. The price-induced 11% projected rise in gold revenue for Barrick Gold in 2020 is likely to represent 110% of the $2.2 billion the company is expected to add in 2020 to its total revenues.

In our interactive dashboard Barrick Gold Corporation Revenues: How Does GOLD Make Money? we discuss Barrick Gold’s business model, followed by sections that review past performance and 2020 expectations for the company’s revenue drivers, and competitive comparisons with Newmont and Freeport-McMoRan.

Overview

• Barrick Gold is primarily a gold and copper producer with mining operations mainly in the US, Latin America, and Africa.
• Gold mining is the largest and fastest growing operating division of the company, contributing 96% of total revenues in 2019.
• Gold revenue growth has been key to Barrick Gold’s stock price appreciation of 133% from $12 in May 2019 to about $28 as of 19th May 2020. A major part of this appreciation, i.e. 51%, came about only in the last 3 months since the WHO announced a global health emergency on 31st January 2020. We discuss Barrick Gold Valuation analysis in full, separately.

Revenue Segments

Barrick Gold reported $9.7 billion in total revenue for full-year 2019. This includes 2 primary operating segments-

• Gold: $9.3 billion in revenues (96% of FY2019 total revenues)
• Copper: $0.4 billion in revenues (4% of FY2019 total revenues)

A negligible part of revenue comes from the sale of by-products from gold and copper mines.

Our interactive dashboard highlights how Barrick Gold’s revenues compare with that of its peers Newmont and Freeport-McMoRan

Gold To Be The Driving Force

• Sales from the gold division have increased over 34% in the last one year from $7.2 billion in 2018 to $9.7 billion in 2019. This mainly reflected inorganic growth due to the Barrick Gold-Randgold Resources deal.
• Division revenue is projected to grow by 11% to $10.2 billion in 2020.
• This is likely to be more than 100% of the company’s projected incremental total revenue in 2020.
• Higher revenue is likely to be driven by marginal growth in gold shipments due to higher demand and production, but the primary factor behind revenue growth in 2020 is the rise in price realization.
• Gold prices have increased by almost 35% in the last one year from $1,300/ounce in May 2019 to $1,745/ounce in May 2020.
• Gold revenue contributed 96% of Barrick Gold’s total revenue in 2019, with its share expected to rise to remain stable in 2020.
• 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 towards the end of 2019. This trend was further boosted by the current COVID-19 crisis which has led to an increase in gold’s value as a hedging instrument.

The current crisis is expected to have a completely opposite effect on Barrick Gold’s copper revenues, making gold the principal driving force for the company in 2020.

Conclusion

Rise in gold prices due to the current crisis has led to expectations of a sharp rise in gold revenues, confirming gold as the primary driving force for Barrick Gold in the near term. Based on Barrick Gold Valuation, Trefis has increased its price estimate for the company’s stock to $25 per share, slightly lower than its current market price of $28.

Similarly, close rival Newmont Corp’s gold division is expected to add $1.5 billion in gold revenue in 2020. In contrast to an upgrade for Barrick and Newmont,  in the worst-case scenario its close-rival Freeport-McMoRan could go to $4 during the current crisis.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. The complete set of coronavirus impact and timing analyses is available here.

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