Barrick Gold is doing better than Freeport-McMoRan Copper & Gold

Freeport-McMoRan (NYSE: FCX) shares  have fallen 12% so far in 2020. But wait,  Barrick Gold (NYSE: GOLD), the  stock  of the same company,  has risen 45% so far in 2020. If we compare the stock price trends of these mining giants over the past few years, we can see that FCX’s stock price has fallen 37%, from $19 at the end of 2017 to nearly $12 as of June 30, 2020. Interestingly, Barrick Gold’s stock price has risen significantly by 86% over the same period. So, despite both companies trading similar products—gold and copper—what has helped Barrick Gold achieve such a much stronger stock market performance than FCX? It’s the growth in revenue and margins, as well as the revenue composition of these companies. 

Barrick Gold’s revenue  increased by 16%, rising from $8.4 billion in 2017 to $9.7 billion in 2019, comparing favorably to  Freeport-McMoRan’s revenue  , which declined by 12.2% over the same period. The gold company’s revenue growth was primarily driven by increased production and mergers, benefiting from the acquisition of Randgold Resources in January 2019, while FCX’s revenue decline reflected negligible gold and copper production from its Indonesian operations due to the ongoing two-year transition of the Grasberg mine from an open-pit to an underground mine. 

Although Freeport-McMoRan’s net income margin was significantly higher than Barrick’s in 2018, due to higher quality and higher revenues (and with Barrick reporting a huge impairment cost in 2018), Barrick Gold’s margin increased sharply from -19.8% in 2018 to 47.1% in 2019 due to the reversal of a one-time impairment charge resulting from the fair value revaluation of certain assets. 

In contrast, FCX recorded losses with a margin of -1.7% in 2019 due to a sharp decline in shipments. The P/E multiple of the two companies is not comparable due to the negative earnings reported by FCX in 2019.

How do Freeport-McMoRan and Barrick Gold compare?

Let’s take a closer look at the main business prospects. Barrick Gold’s activities include gold and copper mining. FCX’s activities include gold, copper, molybdenum, and cobalt mining. Despite their nearly identical products, what is striking is the revenue composition of these two companies.

Barrick Gold’s revenues are heavily concentrated in gold, with the yellow metal contributing nearly 95% of total revenues in 2019. With the acquisition of Randgold Resources, which mainly has mines in Africa including the Kibali Gold Mine in the Northeast of the Democratic Republic of Congo, and the Nevada JV (with Newmont), this contribution is expected to reach 96% in 2020.

In comparison, FCX derived only about 10% of its total revenue from gold, which is expected to reach about 13% in 2020. A slowdown in economic and industrial activity and expectations of a global recession following the outbreak of the coronavirus this year have increased the value of gold as a hedging instrument and safe haven. 

Global gold prices have risen from around $1,500/ounce at the beginning of 2020 to nearly $1,780/ounce currently due to higher demand. 

With increased investment in the yellow metal by major central banks and expectations of lower interest rates, gold prices already experienced a sharp rise in 2019. This trend has been reinforced by the current Covid-19 crisis.

Freeport-McMoRan’s revenues are primarily concentrated in copper, which accounted for 62% of FCX’s revenues in 2019. Unlike gold, the effect of the current crisis has been completely opposite on copper prices, which fell from $2.80/pound at the beginning of 2020 to $2.10/pound in March 2020, before rising to over $2.50/pound currently, which remains below the pre-Covid price. 

This decline is mainly due to expectations of lower demand from the automotive and construction sectors as economic activity slows. Thus, the current crisis has actually benefited Barrick Gold because the majority of its revenue comes from gold, while FCX appears to have fallen behind as it is unable to capitalize on the surge in gold prices with all of its upcoming gold production from Grasberg, which is currently undergoing a transition, while copper revenues are also down.

If there is no sign of a reduction in the coronavirus crisis in the third quarter of 2020, Freeport-McMoRan’s stock could see a sharp decline from its current level. 

Although Trefis has a fair price estimate of $12 per share for  FCX stock  , the worst-case scenario from our colleagues at Mining.com shows that  FCX stock could fall to $4  . Conversely,  Barrick Gold’s valuation  stands at $25, slightly below its current price.

by MNM