Why ABX Stock Could Underperform
Barrick Gold Corporation (USA) (NYSE:ABX) is up roughly 165% as gold prices have increased about 25%. Going forward, could ABX stock continue to provide this sort of return?
Before going into detail, let’s go back to the basics. With gold prices expected to go higher, you want a mining company to be setting up to profit big-time. You want to see it spending on exploration, producing more gold, and focusing on getting its operations in order.
Sadly for Barrick Gold, there’s only one thing working—it has reduced its cost of production significantly.
Consider this: in the first quarter of 2016, the company reduced its all-in sustaining cost per ounce of gold produced by 24%, coming in at $706.00 an ounce, compared to the year-ago period. For the entire year of 2016, Barrick Gold expects these costs to be in the range of $730.00 to $810.00. (Source: “Barrick Reports First Quarter 2016 Results,” Barrick Gold Corporation, April 26, 2016.)
If you look at Barrick’s production, it’s down. In the first quarter, the company produced 1.28 million ounces of gold. A year ago, this number was 1.39 million ounces. In other words, production at Barrick Gold has declined by close to eight percent in one year!
For the entire year of 2016, Barrick Gold expects gold production to amount to between five million and 5.5 million ounces, lower than what it produced in 2015. Also, going forward, ABX stock’s gold production is expected to decline further until at least 2018. (Source: “Corporate Presentation,” Barrick Gold Corporation, accessed July 22, 2016.)
Look at it this way: if gold prices go up to $2,000 an ounce and Barrick Gold produces less, its profitability won’t be as high. This could reflect in ABX stock’s performance going forward.
Then, if you look at the company’s exploration, it has taken a severe hit. In the first quarter of 2016, Barrick Gold only spent $55.0 million on exploration-related expenses. This is down 36% year-over-year!
Remember that exploration is essentially an investment into future production for gold mining companies. If this rate of decline continues for even a little bit, the production figure at Barrick Gold could be revised lower.
Finally, does Barrick Gold have its operations in order?
Well, you see, Barrick Gold has a huge debt problem. At the end of the first quarter of 2016, it had long-term debt of $8.9 billion. With this, don’t forget that the higher the debt a company has, the bigger the costs to finance it. This phenomenon could severely damage the gold miner’s profitability and ultimately hurt ABX stock.
The Bottom Line on ABX Stock
Barrick Gold is one of the biggest names in the gold mining industry and ABX stock is one of the few stocks mentioned as soon as someone hears “gold prices.”
So far this year, for every one-percent increase in gold prices, ABX stock has increased approximately 6.6%. Looking at all the fundamentals, going forward, it shouldn’t come as a shock to investors if Barrick Gold stock underperforms.