Barrick Gold (GOLD), a leading global gold producer, has experienced a stock decline of approximately 21% over the past two months, contrasting with the S&P 500’s 3% gain and a 2% dip in gold prices. This underperformance is surprising considering the substantial surge in gold prices this year, from around $2,050 per ounce in January to about $2,650 currently, representing one of the highest annual increases in a decade. Several factors have contributed to the rise in gold prices, including moderating US inflation, market volatility, and geopolitical uncertainties, driving investors towards the safe haven of gold. November’s Consumer Price Index rise of 2.7%, slightly exceeding October’s 2.6%, hints at a potential Fed rate cut in the near future. The question arises: why hasn’t Barrick’s stock mirrored the impressive gold price rally?
The answer lies in Barrick’s operational challenges, particularly production setbacks during the first half of the year. A slower-than-anticipated ramp-up at the Pueblo Viejo mine, coupled with maintenance activities and lower ore grades from certain mines, have hampered production. While Pueblo Viejo has shown improvement in the third quarter of 2024 with increased production and lower unit costs as part of its ongoing plant ramp-up and stabilization, the overall impact on annual production has been significant. Barrick sold 967,000 ounces of gold in Q3 2024, a 6% decrease compared to the same period last year. While Pueblo Viejo’s production is projected to be higher in 2024 than in 2023, the initial ramp-up phase difficulties have resulted in lower-than-expected output. Similar challenges at Turquoise Ridge, where progress in stabilizing the processing plant and increasing underground production has been slower than anticipated, also contribute to the lower production levels. Therefore, despite favorable gold prices and margins, Barrick’s operational hurdles are expected to continue impacting production into 2025.
Barrick’s cost situation also presents a mixed picture. All-in sustaining costs rose by 20% year-over-year to $1,507 per ounce in Q3 2024. This increase can be attributed to the lower production volumes, affecting economies of scale, as well as inflationary pressures on input costs like labor. Furthermore, the higher gold prices might have inadvertently led to less stringent cost control measures within the mining industry. This faster cost escalation for Barrick could be driving investors towards mining companies with more efficient cost management strategies.
Analyzing Barrick’s stock performance over the past three years reveals considerable volatility, albeit less than the S&P 500. Annual returns were -13% in 2021, -6% in 2022, and 8% in 2023. In contrast, the Trefis High Quality Portfolio, comprising 30 stocks, has demonstrated less volatility and outperformed the S&P 500 consistently over the same period. This superior performance is attributed to the portfolio’s ability to deliver better returns with lower risk compared to the benchmark index, providing a smoother investment experience. Given the current uncertain macroeconomic environment marked by potential rate cuts and ongoing geopolitical conflicts, the question remains whether Barrick will face similar underperformance pressures as seen in 2021 and 2023, or if it will stage a recovery over the next 12 months.
Looking ahead, Barrick’s performance is expected to improve in Q4 2024 and into the next year. This anticipated upturn is based on several factors: the continued ramp-up of the Pueblo Viejo plant expansion, increased throughput at Nevada Gold Mines, and higher grades at Kibali. The company has already reported a substantial 44% year-over-year increase in net earnings per share for the first nine months of 2024, primarily driven by higher gold prices. Furthermore, Barrick’s strategic move to expand its copper business could provide additional upside potential for the stock, considering copper’s crucial role in future-oriented industries such as electric vehicles and renewable energy.
Considering these factors, a price estimate of $21 for Barrick Gold is projected, representing approximately a 25% premium over the current market price. This estimate takes into account the company’s anticipated operational improvements, the positive impact of higher gold prices, and the potential growth from its copper business. A detailed valuation analysis provides further insights into the factors supporting this price estimate. Additionally, an analysis of Barrick Gold’s revenues sheds light on the company’s key revenue streams and their historical trends.
In conclusion, while Barrick Gold has faced recent setbacks due to operational challenges and rising costs, the company’s long-term prospects appear promising. The ongoing operational improvements, coupled with the tailwinds from rising gold prices and the strategic expansion into copper, suggest a potential for recovery and future growth. The projected $21 price estimate indicates a significant upside potential for investors, although the uncertain macroeconomic environment and potential for future volatility warrant careful consideration.
