Image source: Getty Images.

Any investment in Barrick Gold (NYSE:GOLD), as in any other company, carries some degree of risk. With great risk can come great reward, though, so let's take a look at the three greatest risks facing this gold mining leader. 

An excellent resource for examining a company is its annual report. For companies based in the U.S., this is SEC Form 10-K. Barrick Gold, however, is based in Canada; consequently, it provides its annual financials using Form 40-F. There are some differences between the two forms, but just think of it, more or less, as a 10-K with Canadian flair.

Commotion with commodities

It may be stating the obvious, but it certainly doesn't hurt to be reminded that for a company dealing in a commodity -- gold -- there is a fair degree of risk pursuant to volatility in the gold market prices. According to the company's 40-F, "Barrick's business is strongly affected by the world market price of gold and copper. If the world market price of gold or copper were to drop and the prices realized by Barrick on gold or copper sales were to decrease significantly and remain at such a level for any substantial period, Barrick's profitability and cash flow would be negatively affected."

As anyone who follows the financial markets knows, there is little rhyme or reason to their behavior. Pundits who have projected certain market movements are often left, days or months later, trying to explain why the market did not act according to their predictions.

Image Source: Getty Images.

So trying to project the price of gold for a given year is a challenging task. According to Bloomberg, for example, in 2016, year to date, the price of gold has risen approximately 27%; for the same period in 2015, the price of gold had fallen approximately 6%.

Addressing this in the company's 40-F, management acknowledges that, based on its estimates, a $100 per-ounce increase or decrease in the market price of gold could yield an approximate $536 million increase or decrease in the company's earnings before interest, taxes, depreciation, and amortization (EBITDA). For a company that reported EBITDA losses of $710 million and $295 million in 2015 and 2014, respectively, that's no small figure.

Possible project problems

Though mining companies employ scientists to help them identify and analyze potential sites, the success of any given project site is far from an exact science. In the 40-F, management suggests that the economic feasibility of a project is based on multiple factors, such as:

  • the accuracy of reserve estimates
  • capital and operating costs of such projects
  • the timetables for the construction, commissioning, and ramp-up of such projects and any delays or interruptions
  • the accuracy of engineering and changes in scope
  • the ability to manage large-scale construction
  • the future prices of the relevant minerals
  • the ability to secure appropriate financing to develop such projects

This list is far from exhaustive, and it doesn't even address the complications associated with new projects. In the 40-F, the company mentions the possibility of unforeseen obstacles: "It is also not unusual in the mining industry for new mining operations to experience unexpected problems during the start-up phase, resulting in delays and requiring the investment of more capital than anticipated."

Barrick suspended development of its Pascua-Lama project in 2013, for example, and has not revealed whether it plans to resume development of the project. For a company that is committed to reducing its debt, investing additional capital seems unlikely. Barrick paid down $968 million of its total debt in the first half of 2016, and it's looking to shave off another $1 billion by the end of the year. 

Treading or drowning in debt

In addition to the above-mentioned risks, the company's liquidity and level of indebtedness should be paramount concerns for investors. Once more, the 40-F outlines the risk: "Although Barrick has been successful in repaying debt in the past and issuing new debt securities in capital markets transactions, there can be no assurance that it can continue to do so."

In the near term, Barrick should have no problem meeting its debt reduction target of $2 billion in 2016. With only about $150 million in debt due by the end of 2017, Barrick should be able to reduce its total debt even further, improving upon the $4.1 billion in debt reduction it has accomplished through fiscal 2015 and the first half of 2016.

In fact, the company is relatively well-positioned to manage its debt for some years to come. Should it achieve its target and end 2016 with $8 billion in total debt, it would mean that more than half of the company's remaining total debt isn't due until 2033 and beyond. But the best-laid plans of management can easily go astray if the price of gold drops too precipitously, so investors must always remember the extent to which the gold market affects the various aspects -- such as debt repayment -- of the company's operations. 

The takeaway

When considering mining stocks, it's imperative to understand the various ways in which market volatility can affect the company and its operations. A significant drop in the price of gold could severely hamper the company's ability to sustain operations at a given project, forcing management to shut down the project and possibly incur significant losses. But the discussion of the risks facing Barrick Gold isn't meant to dissuade investors from considering a position -- merely educate them. After all, the best type of investor is an informed investor.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.