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Is Barrick Gold Corporation (USA) (ABX) Able to Rally in 2013? – Goldcorp Inc. (USA) (GG), Yamana Gold Inc. (USA) (AUY)

Shares of Barrick Gold Corporation (USA) (NYSE:ABX) continued their downward trend from 2012 and lost almost 12% of their value in 2013 (year-to-date). Barrick Gold Corporation (USA) (NYSE:ABX) along with Goldcorp Inc. (USA) (NYSE:GG) have decided to report the full costs of their productions in an attempt to be more transparent and perhaps regain the confidence of investors. Will this transparency be enough to bring back investors? More importantly, will Barrick Gold Corporation (USA) (NYSE:ABX) rally in 2013?

In 2012, produced around 7.42 million ounces of gold. In the company’s 2013 outlook, Barrick Gold Corporation (USA) (NYSE:ABX) is expected to produce between 7 and 7.4 million ounces of gold. This puts the mean at 7.2 million ounces, which will be 2.7% below the production in 2012. If the company will cut its production by 2.7%, assuming all things equal, this could result in a similar drop in revenues in 2013. This is one aspect that should worry investors. Then there is the matter of costs.

Barrick Gold Corporation (USA) (NYSE:ABX)Since the company is trying to be more transparent, the cost of production is in fact much higher than its “total cash cost”. The company’s average All-in sustaining cash costs were $945 per ounce in 2012. It rose to $972 in the last quarter of 2012. Furthermore, the company’s projection is that this cost will rise in 2013 to the range of $1000-$1100 per ounce.  This will represent around an 8% rise in costs. Assuming all things equal, the company’s operating profitability might fall by around 4 percentage points. So based on the current operating profitability of around 40% (after controlling for the $6.5 billion unusual expense that include impairment goodwill charges), the rise in costs could cut the profitability to around 36%. This is before considering the final factor – the price of gold.

The company used in its 2013 outlook the average price of gold at $1,700. This projection was based on current market prices. I think this assumption is reasonable but could turn out to be much lower. Keep in mind the price of gold has already declined by late February to around $1600. Moreover, the gold didn’t rally (up to date) despite the decision of the FOMC to launch QE3 back at the end of 2012. This decision should have raised the concerns of a potential devaluation of the USD, which tend to raise the demand for safe haven investments including gold. But up to now this scenario didn’t occur. If the US dollar won’t tumble against other leading currencies, and the inflation will remain low, this could impede the potential growth of gold prices in the coming months. For now let’s assume that $1,700 will be the average price of gold in 2013.

Based on the above, if we except the assumptions of the company, then its revenues from gold alone will decline in 2013 by nearly 1%; its profit will fall by nearly 13%; its profitability will decline from around 43% to 38%. If you assume the price of gold will remain around $1,600 per ounce, the revenues fall by almost 7% compared to 2012. So you get the picture…

The situation isn’t likely to be a whole lot better of another big gold producer – Goldcorp Inc. (USA) (NYSE: GG).