Will This Gold Producer’s Rally Continue?

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Gold hasn’t performed well during the year: The price of gold has fallen by more than 20%. This tumble has also adversely affected gold companies such as Barrick Gold (NYSE: ABX). Shares of the company have plummeted more than 50% (year-to-date). But in the past month, the company’s stock has bounced back and rose nearly 10%. This rally coincided with the recovery of the gold market. Will this shift continue? Is this gold company worth reconsidering? 

Gold and silver markets are slowly recovering

During July, both gold and silver prices rallied: Gold price rose 8.5%; silver price, by 2%. This rally has also reflected in the rise in leading precious metals’ ETFs: SPDR Gold (NYSEMKT: GLD) and iShares Silver Trust (NYSEMKT: SLV). During the month, SPDR Gold rose almost 7.5%; Shares of Silver Trust edged up 0.32%.

Despite the recent rally in the price of SPDR Gold, the demand for this ETF continues to fall. The current ETF’s gold holdings are 927.35 tonnes, which are nearly 4.35% below the gold holdings at the end of June and 31.35% below the levels at the beginning of 2013. The decline in gold holdings has also reflected in the drop in its asset value: current asset value is $39.46 billion, which is 24.7% lower than the asset value of $52.43 billion at the end of 2012. Therefore, even though gold has rallied from last month’s tumble, the demand for gold ETF hasn’t improved. 

The iShares Silver trust’s total tonnes of silver is currently at 10,419.02. Moreover, the ETF’s net assets are $6.59 billion, which are nearly 19% below the net assets recorded at the end of 2012. Most of the drop in net assets is due to the sharp fall in silver price during the year. Nonetheless, the current outstanding shares are nearly 3.6% higher than at the end of 2012, which could suggest a slow rise in demand for this ETF. Nonetheless, I think it’s also too soon to determine that gold and silver are making a comeback and this sentiment is reflected in the recent developments in gold and silver ETFs. Let’s turn to examine the upcoming developments of Barrick. 

Second-quarter earnings report

In the upcoming financial report for the second quarter of 2013, Barrick isn’t expected to show growth. Based on the company’s expected gold production, and the average price of gold in the second quarter, the company’s revenue from gold will decline nearly 8% (year-over-year). The table below summarizes this data.

<img alt="" src="http://g.fool.com/editorial/images/61981/abx-gold-revenues_large.jpg" />

As seen in the table below, Barrick’s copper revenue is expected to rise, mostly due to the expected increase in its production.

<img alt="" src="http://g.fool.com/editorial/images/61981/abx-copper-revenues_large.jpg" />

Looking forward -- Is Barrick capable of growing?

In order to determine the progress of Barrick, we will need to examine its gold and copper production and the developments in the metals prices. In terms of production, the company still projects its gold production will range between 7 million and 7.4 million ounces with an average of 7.2 million ounces, which represent a 2.7% drop in production compared to 2012. But at the current pace, the company is heading towards its lower bound. The decline in production is likely to negatively affect its revenue.

The biggest problem, however, is the weak gold market and the tumble in gold price, which, in July, was nearly 22.5% below the price of gold in the third quarter of 2012. The company’s profit margin in the first quarter reached 39%, which is 7 percentage points below the profitability in the first quarter of 2012. If the current price of gold remains at its current range, the company’s profitability may range between 30% and 35% in the coming quarters. The all-in sustaining costs of production are expected to range between $950 and $1,050 per ounce. Therefore, if the price of gold dwindles below $1,100, it could become unprofitable to produce gold. 

Barrick’s recent delay in its Pascua-Lama project in Chile and Argentina will free up some cash for the company by approximately $700 million-$800 million in 2013 and approximately $0.8 billion-$1.0 billion in 2014. This decline in capital expenditure in these years will ease up the company’s cash flow constraint and enable it to allocate these funds towards developing new projections or paying out some of its loans. 

The company’s copper business is doing a bit better even though this segment accounts for 12% of its total revenue. The company projects its average production will be 9% above last year’s production. Conversely, the decline in copper price will eliminate some of the gains in copper production. 

Takeaway

The recent recovery of gold hasn’t impressed investors that continue to slowly move out of gold ETF. The current low gold price, along with the expected decline in gold production, is likely to adversely affect Barrick’s bottom line. Finally, its upcoming quarterly earnings report is likely to show a decline in revenue and narrower profit margins, which could bring down the company’s stock. 

For further reading:

Do Gold and Silver protect you from Inflation?

Is Gold Making a Comeback?

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