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The Yellow Metal: A Safe Haven Asset

Barrick Gold (NYSE: ABX  ) is one of North America's top gold producers. Let's take a look at whether this industry leader will be able to benefit from the weakening dollar in the midst of the government shutdown and possible default of Treasury securities.

Gold is used as a primary input in various industries. It covers multiple sectors, from the aesthetic (69% of gold used in jewelry), to the industrial (9% is utilized for electrical and electronic applications), and other uses (22% for dental, investment, and other sectors). Besides these, the metal itself also signifies remarkable value.

Revenue growth

Source: Barrick Annual Report

Despite the fact that the overall revenue has been increasing, Barrick has seen a plummeting trend in the gold sales volume as the worldwide demand for gold declined in the past few years. However, this fall in gold sales volume was more than offset by the surging price of gold triggered by the increasing demand for jewelry and higher copper sales volume. Gold price volatility was at its peak in FY12, with the price ranging from $1,527 per ounce to $1,796 per ounce. The average market price of $1,669 per ounce represented an increase of 6% over the prior year and was an all-time record high. Revenues also kept increasing due to strong physical demand for copper from emerging markets, especially China.

Operational efficiency

Source: Goldcorp Annual Report

Source: Newmont Mining Annual Report

The company is operating more efficaciously compared to its competitors, Goldcorp (NYSE: GG  ) and Newmont Mining (NYSE: NEM  ) . The realization of operational efficiencies is highlighted by the lower total cash costs of Barrick Gold, a common industry measure, as the company continues to reap economies of scale from its large-scale operations (as shown in the graph below).

Source: Barrick Annual Report

Though Barrick's gold total cash costs for 2012 were $584 per ounce, an increase of 27% over the prior year, it was still well below the costs of Goldcorp ($638/ounce) and Newmont ($677/ounce). The increase reflects higher direct mining costs, particularly higher labor, energy, maintenance and consumable costs, as well as the impact of lower production levels in South America, the lowest cost producer, which resulted in higher consolidated unit production costs.

The company was able to increase copper production by 4% in 2012 primarily due to the inclusion of a full year production impact of Lumwana, compared to only seven months in the corresponding period prior year. Barrick is also performing better than Goldcorp and Newmont in this area as its copper cash costs were lower by $1.33 per pound and $0.17 per pound, respectively, in 2012. The increase in Barrick's copper production costs from the last year reflected higher unit production costs at Lumwana.

The cash costs of Newmont had taken on an increasing trend due to the lower production from Batu Hijau, Tanami, and Waihi, higher royalty and waste mining costs along with higher co-product allocation of costs to copper.

Cash costs had increased by 19.5% for Goldcorp due to lower gold production and higher operating costs, which were partially counterbalanced by a weaker Canadian dollar. The increase in operating costs was attributable to an increase in mining contractors, mainly due to additional long-hole and drilling focused on improving grade predictability, an increase in employee costs, and an increase in consumable costs.

The road ahead
Currently, the price of gold is down at $1,327 per ounce as the dollar continues to weaken due to the uncertain economic environment prevailing in the US. This fall in the value of dollar has made this yellow metal very attractive as an investment as it is priced in US dollars. In fact, this has resulted in an explosion in the physical demand from consumers in Asia, and particularly, China. India also saw record imports earlier in 2013. This buying helped gold rise from its April and June lows of $1,360 and $1,199 respectively.

Barrick is well positioned to benefit from rising demand and enhance its margins as it has the highest production capacity and the lowest cost compared to Newmont and Goldcorp. This way the company can earn from higher sales volume rather than focus on the pricing element, which is beyond its control.

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Related Tickers

9/23/2016 4:00 PM
ABX $18.11 Down -0.42 -2.27%
Barrick Gold CAPS Rating: ***
GG $16.66 Down -0.43 -2.52%
Goldcorp CAPS Rating: ***
NEM $39.56 Down -1.21 -2.97%
Newmont Mining CAPS Rating: ***