The stock price of Barrick Gold Corporation (ABX), among the leading producers of gold and copper, has plunged by 27.6% year-to-date. On the other hand, the price of gold was nearly unchanged on a yearly scale. One of the main factors that affects Barrick's stock price is gold. If gold doesn't rise, as it did in the past several years, this could hold back Barrick's stock from recovering.
As I have stated in the past, there is a strong positive correlation between gold and U.S money base. Therefore, one of the main factors that could contribute to the rally of gold price, and by extension Barrick's stock, is the Fed introducing QE3, which will expand the U.S money base. But in the recent FOMC meeting it was announced the Fed won't issue another quantitative easing (for now). This news doesn't help either gold or Barrick. Besides the effect gold has on the company's stock, there are the recent developments in Barrick's business that could explain its recent fall, and perhaps shed light on what's ahead for this gold producer.
During the past twenty business days (July into August) the linear correlation between Barrick and gold price reached 0.49 (the daily percent changes); therefore, under certain assumptions (including linearity and normality) the changes of gold price could explain nearly 24% of Barrick Gold's stock variance. As seen in the chart below, the relation was much stronger in the past and variances of time. Nonetheless, if gold price won't rise, Barrick Gold's stock will remain unchanged.
There are some reasons for concerns in regards to the company's finances. The company's project in Pascua-Lama, located on the boarder of Chile-Argentina, is expected to produce less than initially anticipated and cost more. The cost of producing gold continues to rise and is currently ranged between $550 and $575 (net cash cost per ounce).
According to the recent financial reports the company's net earnings declined from $1.03 billion in Q1 2012 to $0.75 billion in Q2. This decline in profits may have among the reasons for the replacement of Aaron Regent as CEO.
On the other hand, there was some positive news for Barrick's investors: The company announced it will pay a quarterly dividend of $0.20 per share, which represents nearly 2.3% yield.
The company is expected to start producing gold from its Pueblo Viejo mine at mid-2012. Barrick is the co-owner of this mine along with Goldcorp (GG): Barrick's share is 60%; Goldcorp's share, 40%. The company expects to produce from Pueblo Viejo nearly 100,000 ounces of gold in 2012 and approximately 650,000 ounces of gold in 2013.
This means the mine could positively affect the company's bottom line in 2012. There are some additional projects that will affect the company's income statement in the future such as the Pascua-Lama project that is expected to start running in mid-2014.
These projects could prove to be very profitable assuming the price of gold remains high and the cost doesn't rise. The dividend the company pays makes the investment in the company a bit more attractive than just buying gold - holding gold costs money. But this doesn't necessarily compensate for the decline in Barrick's stock price and its high volatility.
Even though the company has several projects that could result in high profit margins, and even though there was a decline in the correlation between gold and Barrick's stock, the company's stock will continue to rely on the price of gold; if it doesn't rise, Barrick's stock will remain flat. If there is a fundamental change that affects the bullion market, e.g. another quantitative easing, this could rally gold prices, which will help Barrick's stock to recover.
For further reading: Gold and Silver Outlook for August