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Morningstar | Barrick’s Improved 3Q Performance Puts It Back on Track to Hit Full-Year Guidance

During the third quarter, Barrick’s gold production fell by roughly 8% to 1.1 million ounces from 1.2 million ounces in the prior year's quarter. As the company previously guided, production strengthened into the second half. Given the third-quarter improvement, Barrick maintained its full-year guidance for 4.5 million-5.0 million ounces of production at all-in sustaining costs of $765 to $815 per ounce. Year-to-date performance puts the company on track to achieve guidance on both production and costs. We forecast full-year production of 4.6 million ounces at AISC of roughly $750 per ounce.

Our forecast remains largely intact. We’re slightly increasing our fair value estimates to $14 per share and CAD 18 per share from $13.50 and CAD 17.50, respectively, due to the time value of money on our valuation model. Our no-moat rating is unchanged. At current share prices, we see limited risk-adjusted upside at this time.

In September 2018, the U.S. Federal Reserve once again raised the federal-funds rate by 25 basis points to 2.25% from 2%. This was the third rate hike of the year. Most central bank officials expect one additional rate hike in 2018 and three in 2019. The market appears to be largely in line with this view, as current interest-rate option prices imply a more than 70% chance that there will be at least one more hike by the end of 2018.

All else equal, the prospect of higher inflation adds to gold's investment appeal, which is one reason ETF gold holdings rose through most of 2018 and spot prices remained above $1,300. However, as we had anticipated, higher inflation has emboldened the Fed to pursue rate hikes at a quicker pace, which lifts the real interest rate and, in doing so, increases the opportunity cost of holding gold.

Historically, we've observed a strong inverse relationship between the real interest rate and the price of gold. When the former rises, the latter tends to fall. We thought it was only a matter of time before gold investment adjusts to the higher opportunity cost, not only leading to slowing investment demand, but also outflow of gold from ETFs back into the gold market. Our prediction has proven true, as ETFs have seen net outflows since June through September.

On the back of weak investment demand, gold prices have fallen to a nearly $1,200 per ounce. Nevertheless, we still believe gold has a promising future, and we forecast a nominal gold price of $1,300 per ounce by 2020. We expect that, in the long term, Chinese and Indian jewelry demand will fill the gap left by waning investor demand.