EUR 850.00 For Business Accounts Only

Morningstar | Slightly Trimming Barrick’s FVE After Slow First Half; Shares Fairly Valued

During the second quarter, Barrick’s gold production fell by about 25% to a little over 1 million ounces from 1.4 millions in the prior-year quarter. The company expects production to strengthen in the second half as throughput and grade improve at Barrick Nevada, Pueblo Viejo shifts to higher grade ore, and full processing capacity at Porgera is restored. As a result, the company maintained its full year guidance for 4.5 million-5 million ounces at all-in sustaining costs of $765-$815 per ounce. We anticipate the company to achieve the lower end of guidance on both production and costs.

The company made slight cuts to its copper guidance, though the second half should also bring better results. After updating our model for the latest guidance and year-to-date performance, we’re slightly trimming our fair value estimates to $13.50 per share and CAD 17.50 per share from $14 and CAD 18, respectively. Our no-moat rating remains unchanged.

At current share prices, we see limited risk-adjusted upside at this time.

In June 2018, the U.S. Federal Reserve once again raised the federal-funds rate by 25 basis points to a range of 1.75% to 2%. This was the second rate hike of the year. Most officials at the central bank expect two additional rate hikes in 2018. The market appears to be largely in line with this view, as current interest rate options prices imply a more than 66% chance that there will be at least two hikes for the full year.

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 begun to take hold as ETFs saw outflows in all regions in June.

On the back of weak investment demand, gold prices have fallen to slightly above $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.

For more on why rate hikes present a significant risk to near-term gold prices, please see our August 2017 report "Gold is Standing on One Leg."