The gold market has seen a terrible downtrend in the last year with more than 30% decline in prices. Eventually, the gold mining industry has to suffer the pain. However, some of the miners have wisely planned their moves and survived the decline - Barrick Gold (NYSE:ABX) is one of these companies. The stock price for Barrick went down by almost 50% during the last year. The fall in the stock price during the last year gave its long-term investors an opportunity to add to their positions. Barrick has started 2014 strongly and the stock is up over 15% since the start of the year. The improving demand for gold has had a positive impact on the stock price and it looks like Barrick is set to have a profitable year.
Trend in Gold Prices is Expected to be Favorable
After the last year's decline in prices, the gold market is showing a recovery and the prices are getting better. The economic conditions of the U.S. have also favored the market. Following this, gold has hit a three month peak extending its gains after rising the most in six months last week. The market signals have been positive since the beginning of the year as weak U.S. economic data, and emerging market jitters have taken a toll on global equities, increasing demand for gold. Gold is up 10% this year after almost 30% decline during the last year.
Another reason for the price hike is the increasing portfolio allocation of gold for the purposes of diversification. The increasing gold prices due to economic instability in the world's largest economies have led investors to substitute their portfolio constituents with gold, increasing the demand of the commodity. According to the Commodity Futures Trading Commission, based on the signs that gold prices are expected to climb further, speculators have raised their bets on gold futures and options to a three month high. The market expectations and the trend in gold prices indicate that the mining companies are set to benefit from this surge in demand and commodity prices.
Past Performance and Concerns about Rising Costs
Barrick Gold is the largest gold mining company in the world. The company is also involved in the production and sale of copper, which is a relatively smaller portion of the business. Over the period of last year, the company has been through some testing periods due to the decline in gold prices. However, the financials of the company have been solid. The company has offered a decent dividend yield of around 2.5% in the last year.
Barrick reported a net loss of $10.37 billion during the last year. On the face of it, the losses look huge; however, it should be kept in mind that a large chunk of the losses for mining companies during the last year came from the write downs in assets resulting from weak commodity prices. Despite the massive reported losses, the company was able to report over $4 billion in operating cash flows. However, as the commodity prices have started to improve, we are not likely to see such losses in the near future.
The major concerns, however, are the rising costs to extract gold and depleting gold reserves. The losses reported during the last quarter included an impairment charge of over $2.82 billion -excluding the impairment charge; the company would have reported losses of only $10 million, compared to the reported losses of $2.83 billion. The impairment charge mainly came from the cost overruns and halted activities in some of its mines in Argentina, Saudi Arabia and Papua New Guinea. At the moment, the biggest concern is the rise in costs to extract gold - the company will have to control its costs in order to completely benefit from the rising commodity prices.
Barrick has diversified its regional operations in North America, South America and Australia. The company has most of its mines located in South America, and it has the biggest and most attractive gold assets in the world such as Cortez and Goldstrike mines. For the next year, Barrick has decided to allocate its resources wisely in mines selection. Based on this decision, Barrick plans to reduce the production during the year by almost 10% compared from the last year. The production levels are being brought down to achieve efficiency and the focus is being turned to efficient mines.
The investors who initiated a position at the start of the year have enjoyed substantial gains due to the strong performance of the stock. I believe Barrick will have a relatively better year and the stock price will continue to go up. However, increasing extraction costs and depleting reserves remain a real concern for the company. The reported losses should not scare investors as the major portion of the reported loss was a non-cash impairment loss. Furthermore, the future trend in the commodity prices looks favorable to the company, which will ensure better performance of the stock compared to the last year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.