Barrick Gold Corporation (NYSE:ABX) will release 2016 first-quarter results after the market close on Tuesday, April 26, 2016.
Last Quarter: Barrick Gold Corporation reported Q4 EPS of $0.08, exceeding the consensus estimate of $0.06.
A difference of $0.02 with a surprise of 33.30%.
I will examine the impact of the earnings announcement on the value of ABX. The company had a loss of 0.42 per share (Diluted Normalized EPS).
Event of interest: ABX's earnings announcement on February 17, 2016.
Event window (from January 19, 2016 to March 16, 2016): 20 days prior to the event day plus the event day plus 20 days post the event day.
This was 'Good News' since EPS actual was over 2.5% more than expected. It was 33.30% more than expected.
I use the 250 trading day period prior to the event window as the estimation window (from January 21, 2015 to January 15, 2016) for this announcement ('Good News'). So I will estimate the two-factor model parameters over the 250 days prior to the event period.
The two-factor model is as follow:
R ABX= alfa + Beta1 x R MKT+ Beta2 x Change in the Comex
The COMEX is used as a proxy for changes in the price of gold.
SUMMARY OUTPUT | ||||||
Regression Statistics | ||||||
Multiple R | 0,66959209 | |||||
R Square | 0,44835357 | |||||
Adjusted R Square | 0,44388679 | |||||
Standard Error | 0,02608988 | |||||
Observations | 250 | |||||
ANOVA | ||||||
df | SS | MS | F | Significance F | ||
Regression | 2 | 0,13664726 | 0,068324 | 100,3753 | 1,24483E-32 | |
Residual | 247 | 0,168128414 | 0,000681 | |||
Total | 249 | 0,304775674 | ||||
Coefficients | Standard Error | t Stat | P-value | Lower 95% | Upper 95% | |
Intercept | 0,00056511 | 0,00165473 | 0,341513 | 0,733008 | -0,002694069 | 0,003824292 |
ABX | 0,57279941 | 0,16506496 | 3,470145 | 0,000614 | 0,247685036 | 0,897913781 |
COMEX | 2,50664096 | 0,179764271 | 13,94404 | 5,47E-33 | 2,152574605 | 2,860707306 |
I run the regression tool in excel to estimate the betas which represent the exposure of ABX returns to the changes in the stock market price (S&P 500) and in the COMEX:
Barrick's daily return is less volatile than daily S&P 500's return and more volatile than the COMEX over the estimation window (from January 21, 2015 to January 15, 2016).
P-value and t-Stat value for Rmkt and COMEX tell us that the two factors are statistically significant.
Rabx* = 0,0005 + 0,573 x Rmkt + 2.507 x COMEX is the mathematical expression that roughly summarizes the normal return of Barrick Gold Corp.
Now that I have the parameters of the two-factor model, I can calculate the expected return, E(r), the abnormal return (AR), the abnormal cumulative return, CAR, and the abnormal return t-test (AR t-test).
To calculate the expected return, E(r), I will substitute Rmkt and changes in the COMEX with the daily returns on S&P 500 and the daily changes in the COMEX in the two-factor model over the event window, 41 days, from January 19, 2016 to March 16, 2016.
To calculate the abnormal return, we need to subtract from the daily return on Barrick Gold Corp. (which is the actual return) the expected return (E(r)) over the event window.
Then I calculate the cumulative abnormal return. The t-test is calculated as the abnormal return divided by the standard error. The standard error is 0,02608988.
The table represents the abnormal returns of Barrick Gold Corp. as well as the cumulative abnormal returns for earnings announcement of February 17, 2016, categorized as 'Good News' since ABX's actual EPS was plus 33.30% than expected:
For this 'Good News', there wasn't any impact on the share price either on the day that news was released or the day after. There was a positive abnormal return 3 days later the event day and was 5.44%, with a standard error of 0,02608988 leading to an AR t-test value of 2.086 (more than 1.96). But the rise in the share price followed the news that the company announced more than $2 billion in investments at mines in Nevada and Peru.
As you can see, the green spike, which represents abnormal return, is negative and statistically significant on February 26, 2016: it is the highest (downward) over the whole event window investigated.
What can we expect from the next earnings announcements?
I don't expect huge surprise from Barrick's earnings announcements either as missed analysts' expectations on EPS or as exceeded analysts' expectations on EPS.
For the next quarter, analysts expect EPS of $0.09 ranging between a low estimate of $0.01 and a high estimate of $0.23:
As I have already written several times, I got some insights from the way that this gold stock is operating, that the rally in the price of gold that we saw at the beginning of the year won't continue. If what I perceive about future movements in the gold price is correct, Barrick is moving towards an interesting direction. Barrick is capable to neutralize, let's say, falling prices of the precious metal by increasing operations at higher grade mines (less gold production) and reducing operations at lower grade mines in which costs of extractions are, of course, higher than those of higher grade mines.
Barrick is doing the right thing trying to reduce overall production cost. This means that the company will make profit even if the rally in the gold price will not go on. Barrick can easily match the next analysts' expectations on EPS.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.