Over week 51 of 2016 the price of gold fell by 0.34% on the London Bullion Market while Barrick Gold Corp. (ABX, Financial) increased by 2%, from a price of $14.28 per share on Dec. 16, to a price of $14.55 per share on Dec. 23, outperforming the Market Vectors Gold Miners ETF (GDX, Financial) by 1%.
On Dec. 23, Barrick Gold closed Ă‚ at $14.55, up 43 cents (or 3.05%) from the previous close with a volume of 12,430,316 shares traded on the New York Stock Exchange (NYSE) versus an average volume of 15.41 million shares traded over the last 10 trading days and an average volume of 17.78 million shares traded over the last three months.
As of Monday, 10 analysts out of a total of 25 suggest holding shares of Barrick while nine analysts suggest buying shares of the world’s largest gold producer. The analysts' average target price is $20.71, representing a 42.3% upside from the current share price.
Source: Yahoo Finance
Concerning expectations on Barrick’s EPS, analysts estimate that in 2017 the miner will generate EPS of 87 cents, representing a 26.10% increase from the average EPS of 69 cents that they forecast for 2016.
Source: Yahoo Finance
If analysts estimate an EPS of 87 cents on average for 2017, let’s say 22 cents on average each quarter of 2017, this means that Barrick should mine gold from its mineral reserves at a price per troy ounce that on average should be well over $1,335, like it was in the third quarter when the miner generated EPS of 24 cents and the quarterly average gold price was $1,334.932 per ounce. But investors should also consider the fact that in the third quarter of 2016, the miner reported an AISC per ounce of $704 per ounce, which is 5% to 9% lower than the revised guidance on AISC per ounce, which ranges between $740 and $775 per ounce.
A gold price of $1,335.000 per troy ounce implies that gold must climb 18%, or $204 per troy ounce, from the current price.
How much can an 18% increase in the gold price influence the share price of Barrick Gold?
This can be estimated using Barrick's beta gold, which measures the exposure of the gold stock’s returns on the NYSE to changes in the price of the precious metal. The beta gold of Barrick Gold is 1.9, as shown by the picture below:
The betas are computed according to a multifactor model run between November 2015 and November 2016, comprising 253 daily observations on gold stocks, Standard & Poor's 500 prices, the U.S. Dollar Index and U.S. 10-year bond yield data.
If we consider a beta gold of 1.9, an 18% upside in the price of the commodity from the current level may produce a 35% soar in Barrick's share price, at least.
However, another thing that investors should consider here is that when gold trades well above $1,200 per ounce, other gold mining stocks become capable of “economically” mining the precious metal from their deposits. This is particularly true for midtier gold producers such as Iamgold (IAG, Financial), which has proven and probable reserves that are defined at a gold price of $1,200 per ounce.
When gold trades well above $1,200, these midtier gold mining stocks increase at a faster pace on the NYSE than Barrick and its peers. This signals that, after a certain gold price, traders’ attention tends to be centred on these midtier gold producers at the expense of bigger gold mining stocks such as Barrick.
This was true during the period of Feb. 25 to Aug. 1, when the price of gold on the London Bullion Market was $1,272.56 per ounce on average, ranging between a low price of $1,210.50 per troy ounce and a high price of $1,370.00 per troy ounce, and Iamgold gained 120% versus a gain of 64% in the share price of Barrick Gold.
Disclosure: I have no positions in any stock mentioned in this article.
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