Will Barrick Gold’s Tumble Continue?

Barrick Gold’s(NYSE: ABX) failed attempt to merge with Newmont Mining (NYSE:NEM) didn’t vote well in the stock market as its shares fell by more than 6% in the past month. Looking forward, will Barrick Gold’s value keep falling? Let’s review the main developments in recent month, which could impact its valuation.

The gold market stabilizes

The gold market didn’t performed well in the past couple of years, but the price of gold has stabilized in the recent months: During the second quarter (up to date), the average price of gold reached $1,288 per ounces — nearly unchanged from the first quarter of 2014. The company’s assumptions on realized prices are still at $1,300 per ounce, which are inline with the current price of gold. If the price of gold remains stable in the coming months, the company won’t have to adjust its assumptions again and no major write offs will be made.

 

Will production start to pick up again?

In the first quarter earnings report, the company revised down its guidance was for its copper production. Its gold production remained unchanged but remained lower than last year. Based on its production in the first quarter and guidance, its quarterly production is likely to remain close to its production quota as in the first quarter.

The table below shows the expected changes in Barrick Gold’s revenue in the second quarter compared to same quarter last year.

gold barrickpreview for Q22014

Source of data from Barrick Gold’s website

 

As you can see, for the second quarter, the expected 14% drop in production and 8.7% fall in gold price are likely to slash its gold related revenue by almost 22%, year over year. In the first quarter, the company’s net revenue also fell by 22%.

But the company’s production could pick up by 2015: Barrick Gold expects to resume construction in its Pascua-Lama mine in coming months. Barrick Gold’s temporary shutdown of this mine, back in late October 2013, is expected to cost the company $300 million. Moreover, due to this ramp down, it had to compensate its streaming and royalties partners such as Silver Wheaton (NYSE: SLW) for the delay by providing precious metals from other mines. The reopening of the mine for construction will augment its production by 2014-2015. Further down the line, its Goldrush project near the Cortez mine is expected to be completed by the middle of next year.

 

Will production cost further fall?

During the first quarter, Barrick Gold’s all-in sustaining costs for producing an ounce of gold reached $833, which is 10% below the cost of production in the parallel quarter in 2013. The company’s annual guidance is still around $950. But if it maintains a low production cost as in the first quarter, this could partly offset the low prices of gold. As presented in the table above, if Barrick Gold’s all-in sustaining costs don’t change, its cash margin per ounce will remain stable around 35%.

 

One way Barrick Gold is reducing its production cost is by selling non-core assets. During the past year, it has divested several assets for over $1 billion, including its Kanowna and Plutonic mines in Australia. This asset reduction plan is likely to keep cutting down its production costs and bring in cash.

 

Other gold companies have also been making great strides in reducing their production costs:Duringthe first quarter of 2014, Yamana Gold (NYSE: AUY) recorded an all-in sustaining cost of $820 per GEO — a 4% drop from the $856 per GEO recorded in first quarter of 2013.

 

Takeaway

Barrick Gold isn’t likely to show any dramatic developments in its second quarter earnings report. But if the company succeeds in maintaining its low production cost, this may partly offset the low prices of gold and reduced production quota. Finally, as the price of gold stabilizes, Barrick Gold’s stock is also likely to level out.

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Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.