industry analysis - gold mining in canada -...

Industry Analysis - Gold Mining in Canada 1

Industry Analysis - Gold Mining in Canada Fundamental Analysis of Barrick Gold and Goldcorp Inc.

Basant Ramachandran

Canadian Securities Course | George Brown College, Toronto | 2014


TABLE OF CONTENTS

TABLE OF CONTENTS ............................................................................................................................... 2

EXECUTIVE SUMMARY ............................................................................................................................ 3

INTRODUCTION ....................................................................................................................................... 4

Company Analysis ............................................................................................................................... 4

Analysis Approach ............................................................................................................................... 5

Industry Analysis Overview ..................................................................................................................... 6

Ratio Analysis: ..................................................................................................................................... 6

Dividend Discount Model Analysis:..................................................................................................... 6

PESTELE Analysis: ................................................................................................................................ 8

SWOT Analysis: ................................................................................................................................... 9

VRIO Analysis: ................................................................................................................................... 10

Conclusion ............................................................................................................................................. 11

Recommendations ................................................................................................................................ 11

LIST OF APPENDIX ................................................................................................................................. 12

APPENDIX – I COMPANY RATIOS ................................................................................................. 13

Liquidity Ratio: .............................................................................................................................. 13

Profitability ratio: .......................................................................................................................... 14

Risk Ratios: .................................................................................................................................... 15

Value ratios: .................................................................................................................................. 16

Operating Performance Ratios: .................................................................................................... 18

APPENDIX – II DIVIDEND DISCOUNT MODELS (DDM) .................................................................. 19

DDM – Goldcorp ........................................................................................................................... 19

DDM – Barrick Gold ....................................................................................................................... 22

APPENDIX – III INDUSTRY PESTEL ANALYSIS ................................................................................. 25

APPENDIX – IV INDUSTRY SWOT ANALYSIS ................................................................................... 28

APPENDIX – V VRIO ANALYSIS ...................................................................................................... 29

VRIO –GOLDCORP ......................................................................................................................... 29

VRIO – BARRICK GOLD .................................................................................................................. 31

BIBLIOGRAPHY ...................................................................................................................................... 33


EXECUTIVE SUMMARY

Challenging times ahead for gold miners

Mining industry in Canada is undergoing a consolidation after a growth cycle. The

industry at large is going through a downturn and is adjusting to the market risks.

In the last year, both commodity and equity prices have been falling globally followed

by multiple billion dollar write-downs. Gold is no more seen as a safe investment haven and

the commodity demand from Asian giants - India and China has considerably dwindled

pushing down the markets globally.

The consistency of poor profitability ratios from the leading gold producers in recent

quarters has driven away investor confidence in the sector. The huge write-offs, legal issues

around the mining permits, environmental challenges and new tax regulations have further

dented the investor sentiments.

The ratio analysis of the leading companies against the industry indicates that, both

2012 and 2013 had been a very rough ride for the mining sector. On the operations front,

projects have been deferred and capital spending subdued.

Both Barrick Gold and Goldcorp seem to maintain a strong liquid position, though

their profitability is well into the negative territory. Among them, Barrick gold seems to have

an aggressive approach and hence considerably risky.

The fundamental analysis, PESTEL and SWOT analysis for the gold mining industry

reveals a whole lot of new perspective and lists the challenges faced by the gold mining

industry in Canada.


INTRODUCTION

A look into the gold mining industry in Canada reveals a challenging time ahead for

the sector. This report delves into a comprehensive analysis of two of the industry leaders in

gold mining sector in Canada – Barrick gold and Goldcorp Inc. The analysis covered the

fundamental health of the company, their strengths and the global environment in which they

operate.

Company Analysis

The report analyses the two companies comparing them head to head and against the

industry performance for the last 4 years to study and understand the differences and

challenges they pose to an investor.

The companies had been compared using the fundamental analysis technique by

looking into their financial statements

Income Statement

Balance sheet

Cash flow statement

Four analysis techniques have been employed to study the two companies as follows:

Company Ratio Analysis

PESTEL Analysis

SWOT Analysis

VRIO Analysis


Analysis Approach

Following are the criteria used to select the two companies - Barrick gold and

Goldcorp for this project:

Both the companies are listed in Toronto Stock Exchange (TSX

The market capitalization of both companies is closer hence allowing for a fair

comparison.

The region of mining operations for both is primarily based out of South and Central

America.

The primary commodity mined by either is Gold.

Both are industry leaders and hence contribute to the sector standards.


Industry Analysis Overview

Ratio Analysis:

Following are the findings from comparing Barrick Gold against Goldcorp based on

their ratio analysis.

Both companies holds a strong liquidity position, though their profitability numbers

are negative. Among the two Barrick gold is aggressive and more risky compared to a

conservative approach shown by Goldcorp when it comes to sourcing their finance

requirements for growth. Among the two Barrick gold delivers higher dividends and hence

generates more cash flow sharing the profits and keeping their investors happy. From a

shareholders perspective Barrick offers a higher value to Goldcorp over a period from 2010

to 2013.

[Refer to Appendix – I for more details]

Dividend Discount Model Analysis:

The dividend discount model (DDM) is a method of valuing a company's stock price

based on the theory that its stock is worth the sum of all of its future dividend payments,

discounted back to their present value. [1] In other words, it is used to value stocks based on

the net present value of the future dividends

In discounted cash flow (DCF) valuation techniques the value of the stock is

estimated based upon present value of some measure of cash flow. Dividends are the cleanest


and most straightforward measure of cash flow because these are clearly cash flows that go

directly to the investor.

In our valuations for Barrick Gold and Goldcorp, we have used a mix of approaches

to arrive at the DDM values for the years from 2012 to 2016.

We initially calculated the required rate of return to base our assumptions. We arrived

at the rate of return based on the following formula:

rGG = RF + βGG [E(RM) – RF]

Where,

RF = Rate of return on LT Treasury Composite

E(RM) = Expected rate of return on market portfolio

βGG = Systematic risk (β) of the company’s common stock

Basing this rate of return, we calculated the intrinsic stock value using the present

value technique. The Intrinsic share value is then compared to the current value of the stock.

Following this, an expected dividend growth rate is arrived at by PRAT model for the

first year (2012) followed by arriving at a dividend growth rate for the last year (2016) using

Gordon’s model.

Later, using the H-model, we arrived at the growth rate for the interim years based on

the first and last year’s growth rate and interpolating for rest of the years.


We noticed that the growth potential for Barrick gold holds a positive outlook while

Goldcorp showed a declining trend till 2016.

[Refer to Appendix – II for more details]

PESTELE Analysis:

PEST analysis ('Political, Economic, Social and Technological analysis''') describes a

framework of macro-environmental factors used in the environmental scanning component of

strategic management. It is a part of the external analysis when conducting a strategic

analysis or doing market research, and gives an overview of the different macro-

environmental factors that the company has to take into consideration. It is a useful strategic

tool for understanding market growth or decline, business position, potential and direction for

operations.

[Refer to PESTELE analysis from Appendix – III for more details]

In our PESTEL analysis, we looked at the south and central America where most of

the gold mining operations for both Barrick and Goldcorp is focused. They analysis shows a

challenging times ahead for both the companies to operate business in these regions due to

factors like high corruption, Sub-standard infrastructure, Legal and environmental issues

among many other listed in the report.


SWOT Analysis:

We further looked at the SWOT analysis from the gold mining industry’s perspective

to understand the sector profile.

A SWOT analysis (alternatively SWOT matrix) is a structured planning method used

to evaluate the strengths, weaknesses, opportunities, and threats involved in a project or in a

business venture. A SWOT analysis can be carried out for a product, place, industry or

person. It involves specifying the objective of the business venture or project and identifying

the internal and external factors that are favourable and unfavourable to achieve that

objective.

Setting the objective should be done after the SWOT analysis has been performed.

This would allow achievable goals or objectives to be set for the organization.

Strengths: characteristics of the business or project that give it an advantage

over others.

Weaknesses: characteristics that place the business or project at a

disadvantage relative to others

Opportunities: elements that the project could exploit to its advantage

Threats: elements in the environment that could cause trouble for the business

or project

[Refer to APPENDIX – IV for more information]


VRIO Analysis:

The VRIO framework, in a wider scope, is part of a much larger strategic scheme for

a firm. The basic strategic process that any firm goes through begins with a vision statement,

and continues on through objectives, internal & external analysis, strategic choices (both

business-level and corporate-level), and strategic implementation. The firm will hope that this

process results in a competitive advantage in the marketplace they operate in. VRIO falls into

the internal analysis step of these procedures, but is used as a framework in evaluating just

about all resources and capabilities of a firm, regardless of what phase of the strategic model

it falls under. VRIO is an acronym for the four question framework you ask about a resource

or capability to determine its competitive potential: the question of Value, the question of

Rarity, the question of Imitability (Ease/Difficulty to Imitate), and the question of

Organization (ability to exploit the resource or capability).

The Question of Value: "Is the firm able to exploit an opportunity or neutralize an

external threat with the resource/capability?"

The Question of Rarity: "Is control of the resource/capability in the hands of a

relative few?"

The Question of Imitability: "Is it difficult to imitate, and will there be significant

cost disadvantage to a firm trying to obtain, develop, or duplicate the

resource/capability?"

The Question of Organization: "Is the firm organized, ready, and able to exploit

the resource/capability?"

[Refer to APPENDIX – V for more information]


Conclusion

From the above fundamental analysis of Barrick gold and Goldcorp, it is evident that

Barrick gold proposes a value bet for the investors and is a value stock to invest for long

term. With the current difficulties and challenges faced by the industry and considering the

cyclical nature of the sector in general, the current stock valuation for both the companies are

under-valued and fair.

Recommendations

We recommend to “Buy” into Barrick Gold heavily and a “hold” for Goldcorp in the

near term.


LIST OF APPENDIX

APPENDIX – I COMPANY RATIOS

APPENDIX – II DIVIDEND DISCOUNT MODELS (DDM)

APPENDIX – III INDUSTRY PESTEL ANALYSIS

APPENDIX – IV INDUSTRY SWOT ANALYSIS

APPENDIX – V VRIO ANALYSIS


APPENDIX – I COMPANY RATIOS

Liquidity Ratio:

Ratios 2013 2012 2011 2010

Liquidity Ratio: Ratios Explained Ratios Analyzed

GoldCorp

Current ratio

1.168 2.055 3.826 1.723 Current ratio ascertains whether a company's short-term assets are readily available to pay off its short-term liabilities. The higher the current ratio, the better.

Both Goldcorp and Barrick has a strong current asset position to pay off their current debts at a comfortable margin for all the 4 previous fiscal years, but the overall industry has consistently better current ratio than these two companies.

Barrick 2.154 1.328 2.248 2.839

Industry 1.800 2.950 3.530 3.590

GoldCorp

Quick ratio

0.787 1.360 3.021 1.257 Quick ratio excludes inventory and other current assets, which are more difficult to turn into cash. Therefore, a higher ratio means a more liquid current position.

The industry on an average had a higher liquid current position for the last 4 fiscal year compared to either Goldcorp or Barrick. It is noteworthy that either of the company holds a strong liquid position to thwart any immediate liabilities as and when they arise.

Barrick 1.197 0.663 1.348 2.079

Industry 1.230 2.280 2.940 2.940

GoldCorp

Cash ratio

0.310 0.720 2.320 0.651

The cash ratio is an indicator of a company's liquidity that further refines both the current ratio and the quick ratio by measuring the amount of cash, cash equivalents or invested funds there are in current assets to cover current liabilities. Few companies maintain high levels of cash assets to cover current liabilities since it's often seen as poor asset utilization for a company to hold large amounts of cash on its balance sheet, as this money could be returned to shareholders or used elsewhere to generate higher returns.

Both companies appears to maintain healthy cash assets to cover any immediate liabilities, though in 2010 and 2011, they seems to have held on to a large amounts of cash on their balance sheet especially since the market was good and they could have used the extra cash for investment purposes to generate higher returns.

Barrick

0.834 0.474 0.943 1.593

Industry


Profitability ratio:

Ratios 2013 2012 2011 2010

Profitability ratio Ratios Explained Ratios Analyzed

GoldCorp

Return on Asset

-9.16% 5.65% 6.40% 7.42% ROA illustrates how well management is employing the company's total assets to make a profit. The higher the return, the more efficient management is in utilizing its asset base.

Comparing the ROA numbers with the broad industry, both Goldcorp and Barrick management appears to have a poor asset management strategies in place. Both the companies management have consistently been laggards in employing their assets to maximize and generate profits.

Barrick -

27.68% -1.14% 9.17% 10.34%

Industry 2.250 2.050 6.600 10.210

GoldCorp

Return on Equity

-13.86% 7.70% 8.84% 10.49%

The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

It is evident from the numbers that both the companies lag way behind the industry when generating returns for the equityholders. Between them though, over the last 4 years, Barrick gold comparatively rewarded their shareholders more than Goldcorp.

Barrick -

76.60% -2.46% 19.19% 18.40%

Industry -0.830 0.800 12.730 17.120

GoldCorp

Return on

Capital Employed

-8.21% 6.77% 7.52% 5.29% The return on capital employed (ROCE) ratio, expressed as a percentage, complements the return on equity (ROE) ratio by adding a company's debt liabilities, or funded debt, to equity to reflect a company's total "capital employed". This measure narrows the focus to gain a better understanding of a company's ability to generate returns from its available capital base.

Both companies seems to be funding their capital requirements mostly through debt allocations and hence has been consistently generating lower returns over the last 4 years. Comparing to their ROE numbers, the ROCE numbers for either of them showed a poor performance. During this period, the industry returns had been considerably far better and other companies appears to generate better return than either goldcorp or Barrick.

Barrick -25.78% -0.71% 14.52% 15.78%

Industry

8.800 10.460 9.010 18.690


Risk Ratios:

Ratios 2013 2012 2011 2010

Risk Ratios Ratios Explained Ratios Analyzed

GoldCorp

Debt Ratio

0.339 0.267 0.276 0.293

Debt ratio determines a company's risk level, how much debt a company has relatively to the asset. Debt ratio of 30% means the company possesses 100$ assets for every 30$ debt. Analyzing the ratio depends on the industry (high ratio, >40%, are the norm in the mining sector. Other sectors with volatile cash flow should observe a lower ratio.

The debt ratio for the mining industry has always been around 0.5 to 0.6 in the last decade (since 2005), flattening at 50% leading upto 2013. GoldCorp, with a considerably lower debt compared to industry and Barrick corp, presents a lower risk to shareholders since the amount of debt it holds relative to its assets is quite low without necessarily implying on the better health of GoldCorp compared to Barrick.

Barrick 0.639 0.538 0.522 0.438

Industry 0.500 0.500 0.500 0.500

GoldCorp

Debt to Equity

0.076 0.034 0.035 0.036

measures the company financial leverage, it indicates what proportion of equity and debt the company is using to finance its assets. Auto manufacturing companies usually have a high ratio, ~2, meaning an agressive financing of growth using debt, while PC companies have a ratio of under 0.5. Mining Industry in canada, usually have a 30-35% debt to equity in their balance sheet.

Barrick gold appears to be more aggressive in their debt financing strategy compared to industry, and GoldCopr in particular, in terms of financing its growth using the debt. Both companies portrays inefficiency in equity and debt management with regard to financing their assets. while Barrick is more agressive, thus presenting a higher risk, GoldCorp tends to be too conservative on how well the company could maintain its growth (new projects on new sites) without the use of debt.

Barrick

0.953 0.554 0.564 0.340

Industry

0.430 0.320 0.300 0.280

GoldCorp

Asset Coverage

Ratio

11.629 35.982 36.453 35.951

Asset Coverage ratio is a test of the ability of a company to cover debt obligations after all liabilities are satisified. Utilities should have a ratio of 1.5, industrial companies should have 2. Mining industry in canada tends to maintain a ratio around 2.5

While Barrick gold has an asset coverage ratio close to the industry, GoldCorp is far higher than the standard and this makes completely sense since the company use very little debt to finance its growth, a ratio that decreased relatively in 2013 but it stayed far above the industry average and Barrick.

Barrick 2.210 2.573 2.733 3.926

Industry


Value ratios:

Ratios 2013 2012 2011 2010

Value ratios Ratios Explained Ratios Analyzed

GoldCorp

Earnings Per

Share

-3.335 2.155 2.322 2.569

the most important variable into determining the share's price. It tells how well a company is generating profit for its shareholders.. Negative means the company is losing money (net loss per share) and the value of the stock decreases. Possible explanations (money loss, big onetime expense, assuming a big liability, writing down the value of a major asset..

GoldCorp, due to the high all-in sustaining cost, 1134$ per ounce during the first quarter of 2013, and relatively poor selling of 595k ounces on production of 614k, was unable to maintain the same level of profit generated for its shareholders from 2010 until 2012. This may also be explained by the fact that 3 of its major projects in its development pipeline were still not operational.

Barrick -8.901 -0.537 4.482 3.587

Industry

GoldCorp

Dividend Payout Ratio

-0.180 0.251 0.177 0.082

The percentage of earnings a company pays out in dividends. 0.25 Or 25% means the company is willing to pay 25 cents dividend for every 1$ earned at the end of a given period. It tells how healthy is the dividend-paying company is. Ratio over 50% is suspicious, close or over 100% means dividends are not being covered by earnings. Worse, if it is negative, the company is paying dividends despite reporting a loss.

during the fiscal year 2013, all four largest gold miners, GoldCorp, Barrick, Newmont and AngloGold reported catastrophic losses which when combined totaled right under 18 billion$. Despite these losses, all four companies continued to pay dividend to investors and all four companies have seen their stocks rise by as much as 30%. the losses were in fact related to impairment charges (writing off all worthless goodwill) and on an underlying basis, all of them remained profitable

Barrick

-0.056 -1.396 0.114 0.123

Industry

GoldCorp

P/E

-26.763 16.143 13.500 16.229 Indicator of the value of a stock, the stock's P/E tells how much investors are willing to pay per $ of earnings. P/E of 20 means investors are willing to pay 20$ for every 1$ of earnings the company generates. Negative EPS leads to negative or Null P/E: meaning the company is not profitable.

Comparing GoldCorp and Barrick's P/E from 2010 to 2012 demonstrates GoldCorp stock has been more valuable that Barrick during that period, more closer to the industry's average with exception in the last fiscal 2013 where both companies reported losses that impacted the "theoretical" value of the stock without really having a factual impact on the market value of it.

Barrick -14.985 5.275 4.386 5.852

Industry 26.220 20.620 19.550 16.590


GoldCorp

Dividend Yield

0.020 0.018 0.013 0.007 Measures how much cash flow an investor is getting for each dollar invested in an equity position. If ABC pays a dividend of 1$ and the stocks is trading at 20$, the DY=5%.

the dividend yield shows how both companies are willing to maintain the same, if not more than the industry average cash flows the investors are getting from a 1$ invested in the equity position.

Barrick 0.025 0.038 0.026 0.022

Industry 0.021 0.016 0.014 0.008

GoldCorp Equity value per

common share

24.062 27.992 26.264 24.491

The amount of money that a holder of a common share get if a company were to liquidate.

GoldCorp common shareholders are certainly on a better position than those of Barrick, given a liquidation scenario.

Barrick 11.620 21.821 23.353 19.501

Industry

Industry Analysis - Gold Mining in Canada 18 Operating Performance Ratios:

Ratios 2013 2012 2011 2010

Operating Performance Ratios Ratios Explained Ratios Analyzed

GoldCorp

Gross profit

margin

28.804 45.365 61.917 60.514 It assesses the financial health of a company by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. GPM of 50% means that for every 1$ the company earns, it really has only 0.50$ at the end of the day.

For the gold miners, the trend during the last decade has been an increase in the Gross profit Margin mainly due to the widening spread among the average cash cost and the average gold price. The Gross Margin, set at 35% in 2001, reached for the gold mining industry an average of 57%. In 2012, both of GoldCorp and Barrick embraced the same numbers (around 57%) that decreased sharply in 2013 for GoldCorp, moderately for Barrick. Certainly due to the significant decline of gold price in 2013 and with it came the shrinking margins and decreased cash flows. Observations that have been confirmed by the recent annual report (2013) of GoldCorp.

Barrick

42.107 49.583 56.167 53.077

Industry

GoldCorp

Net return on common

equity

5.434 9.306 15.607 11.569

Useful ratio to compare the growth and profitability of companies within the same industry

Barrick, being the largest gold producer and having the most mines and the most reserves, hast more growth and profitability with more production of gold. But, as it is suggested by other ratios, production is only one small part in the valuation of companies by investors, and this in fact is more obvious in the P/E and the Equity Value per Common Share ratios for both companies, where GoldCorp stock has more value that Barrick and the shareholders of GoldCorp get more cash flow that those of Barrick.

Barrick

38.927 32.671 34.225 29.987

Industry

GoldCorp

Inventory turnover

ratio

3.611 3.658 3.557 Shows how many times the company's inventory is sold and replaced over a period. It should be compared against industry average. Low ratio implies poor sales and excessive inventory. High ratio implies successful sales or ineffective buying

The ratio demonstrates more efficiency in the sales process of GoldCorp than it would for Barrick. Indeed, GoldCorp has been successful in selling its inventory every 100 days, while it is of 130 days for Barrick.

Barrick 2.704 2.693 2.498 2.871

Industry


APPENDIX – II DIVIDEND DISCOUNT MODELS (DDM)

DDM – Goldcorp

Intrinsic Stock Value

Goldcorp Inc., dividends per share (DPS) forecast

Year Value DPSt or Terminal value (TVt)

Calculation Present value at 8.71%

0 DPS01 0.54

1 DPS1 0.57 = 0.54 × (1 + 6.03%) 0.53

2 DPS2 0.61 = 0.57 × (1 + 6.18%) 0.51

3 DPS3 0.65 = 0.61 × (1 + 6.33%) 0.50

4 DPS4 0.69 = 0.65 × (1 + 6.48%) 0.49

5 DPS5 0.73 = 0.69 × (1 + 6.63%) 0.48

5 Terminal value (TV5) 37.68 = 0.73 × (1 + 6.63%) ÷ (8.71% – 6.63%)

24.82

Intrinsic value of Goldcorp's common stock (per share) $27.34

Current share price $27.72

Required Rate of Return

Assumptions

Rate of return on LT Treasury Composite1 RF 3.03%

Expected rate of return on market portfolio2 E(RM) 13.48%

Systematic risk (β) of Goldcorp's common stock βGG 0.54

Required rate of return on Goldcorp's common stock3 rGG 8.71%

rGG = RF + βGG [E(RM) – RF] = 3.03% + 0.54 [13.48% – 3.03%] = 8.71%


Dividend Growth Rate (g) Dividend growth rate (g) implied by PRAT model Goldcorp Inc., PRAT model

Averages 2010 to 2013

Retention rate 0.77

Profit margin 38.39%

Asset turnover 0.15

Financial leverage 1.36

Dividend growth rate (g) - PRAT Model 6.03%

g = Retention rate × Profit margin × Asset turnover × Financial leverage

Dividend growth rate (g) implied by Gordon Growth model

g = 100 × (P0 × r – D0) ÷ (P0 + D0). 6.63%

P0 = current price of share of Goldcorp's common stock D0 = last year dividends per share of Goldcorp's common stock r = required rate of return on Goldcorp's common stock

Dividend growth rate (g) forecast

Goldcorp Inc., H-model

Year Value gt

1 (PRAT Model) g1 6.03%

2 (Interpoltion between 1 and 5) (g5-g1)x(2-1)/(5-1) g2 6.18%

3 g3 6.33%

4 g4 6.48%

5 (Gordon g5 6.63%


DDM=DPS/(r-g)

Year gt (Growth Rate) r (required rate of Return) DPS (Dividend per Share) DDM Value (Goldcorp) market value

1 (2012) 0.0603 0.0871 0.53 19.7761194 35

2 0.0618 0.0871 0.51 20.15810277 35

3 0.0633 0.0871 0.50 21.00840336 40

4 0.0648 0.0871 0.49 21.97309417 45

5 (2016) 0.0663 0.0871 0.48 23.07692308 35

Industry Analysis - Gold Mining in Canada 22 DDM – Barrick Gold

Intrinsic Stock Value

Barrick Gold Inc., dividends per share (DPS) forecast

Year Value DPSt or Terminal value (TVt)

Calculation Present value at

3.68%

0 DPS01 0.75

1 DPS1 0.83 = 0.75 × (1 + 10.74%) 0.8

2 DPS2 0.9 = 0.83 × (1 + 7.95%) 0.83

3 DPS3 0.94 = 0.90 × (1 + 5.19%) 0.85

4 DPS4 0.97 = 0.94 × (1 + 2.41%) 0.84

5 DPS5 0.96 = 0.97 × (1 + -0.37%) 0.8

5 Terminal value (TV5) 23.73 = 0.96 × (1 + -0.37%) ÷ (3.68% – -0.37%) 19.81

Intrinsic value of Barrick Gold's common stock (per share) $23.93

Current share price $19.78

Required Rate of Return

Assumptions

Rate of return on LT Treasury Composite1 RF 0.0297

Expected rate of return on market portfolio2 E(RM) 0.1351

Systematic risk (β) of Goldcorp's common stock βGG 0.07

Required rate of return on Barrick Gold's common stock3 rGG 0.0368

rABX = RF + βABX [E(RM) – RF] = 2.97% + 0.07 [13.51% – 2.97%] = 3.68%


Dividend Growth Rate (g) Dividend growth rate (g) implied by PRAT model Barrick Gold Inc., PRAT model

Averages 2010 to 2013

Retention rate 0.88

Profit margin 19.77%

Asset turnover 0.31

Financial leverage 2.01

Dividend growth rate (g) - PRAT Model 10.74%

g = Retention rate × Profit margin × Asset turnover × Financial leverage

Dividend growth rate (g) implied by Gordon Growth model

g = 100 × (P0 × r – D0) ÷ (P0 + D0) = 100 × ($18.49 × 3.68% – $0.75) ÷ ($18.49 + $0.75) = -0.37% where: P0 = current price of share of Barrick Gold's common stock D0 = last year dividends per share of Barrick Gold's common stock r = required rate of return on Barrick Gold's common stock

-0.37%


DDM=DPS/(r-g)

Year gt (Growth Rate) r (required rate of Return) DPS (Dividend per Share) DDM Value (Barrick gold)

1 (2012) 10.74% 3.68% 0.5 22.945845

2 7.96% 3.68% 0.7 24.645456

3 5.19% 3.68% 0.9 27.484784

4 2.41% 3.68% 1 29.984747

5 (2016) -0.37% 3.68% 0.5 27.474444

Dividend growth rate (g) forecast

Barrick Gold Inc., H-model

Year Value gt

1 (PRAT Model) g1 10.74%

2 (Interpoltion between 1 and 5) (g5-g1)x(2-1)/(5-1) g2 = g1 + (g5 – g1) × (2 – 1) ÷ (5 – 1)

= 10.74% + (-0.37% – 10.74%) × (2 – 1) ÷ (5 – 1) = 7.96% g2 7.96%

3. g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)

= 10.74% + (-0.37% – 10.74%) × (3 – 1) ÷ (5 – 1) = 5.19% g3 5.19%

4. g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1) = 10.74% + (-0.37% – 10.74%) × (4 – 1) ÷ (5 – 1) = 2.41%

g4 2.41%

5 (Gordon growth model) g5 -0.37%


APPENDIX – III INDUSTRY PESTEL ANALYSIS

EXTERNAL ENVIRONMENT

PESTELE ANALYSIS

Gold Mining Industry in South and Central America

South America Central America

ARGENTINA CHILE MEXICO DOMINICAN REP GUATEMALA

POLITICAL ENVIRONMENT

PARIAH STATE HIGHLY FRAUD AND CORRUPT CRONYISM HARRASMENT OF BUSINESSES COMPETITION FROM BRAZIL AND COLOMBIA CREDIT CRISIS 2008 INCREASED REGULATIONS

ELECTIONS DO NOT MEET ANTI-CORRUPTION INTERNATIONAL STANDARDS. HIGHLY FRAUD AND CORRUPT. NEED TO RAMP UP INFRASTRUCTURE LENGTHY MINING PERMIT PROCESS


ECONOMICAL ENVIRONMENT

ECONOMY ON RISE SINCE THE RECENT CRISIS HIGH GDP GROWTH VAST RESOURCES OF NATURAL GAS AND OIL: SELF-SUFFICIENT ENERGY MINING: RATED ONE OF THE MOST ATTRRACTIVE AND PROFITABLE INDUSTRIES FAVORABLE TO START NEW BUSINESSES HIGH TAXES CHALLENGES IN MOVING MONEY ACROSS BORDERS VOLATILE METAL PRICES

LARGEST EXPORT RELATIONSHIP WITH USA (CRUDE PETROL, REFINED OIL, MOTOR VEHICLE PARTS, MOTOR VEHICLES) ECONOMICALLY TIED TO USA (NAFTA 1994) PRICE AND CURRENCY VOLATILITY HIGH INSURANCE COSTS

SOCIAL ENVIRONMENT

EGALITARIAN DISTRUIBUTION OF WEALTH 9700$ PER CAPITA GDP HIGHEST IN LATIN AMERICA ECONOMIC CLASS STRATIFICATION: VERY LITTLE VAST MIDDLE CLASS STRONG LABOUR UNION

ANTI MINING AGENDA IN COMMUNITIES YOUNG POPULATION: >75% ARE LESS THAN 40 YEAR OLD MEDIAN AGE - 27 LIFE EXPECTANCY: 77 PREDICTION BY 2050: DRAMATIC SHIFT IN THE POPULATION: MEDIAN AGE TOWARDS 42

TECHNOLOGICAL ENVIRONMENT

TECHNOLOGICAL DICHOTOMY BETWEEN URBAN CENTERS AND ELSEWHERE INCONSISTENT ROAD INFRASTRUCTURE: MORE DEVELPED IN AND BETWEEN URBAN AREAS WEAKER TELECOM SYSTEM COMPARED TO OTHER SIMILAR COUNTRIES

EDUCATION

HIGHEST LITERACY RATE IN THE WORLD: 96.2% ABLE TO READ HIGHEST OF UNIVERSITY GRADUATES IN LATIN AMERICA 3 TIMES HIGHER THAN BRAZIL AND MEXICO PER 100.000 STUDENTS

LEGAL ENVIRONMENT

TWO SYSTEMS: FEDERAL COURT AND PROVINCIAL COURT LABOR COURT IS PART OF THE PROVINCIAL SYSTEM


ENVIRONMENT

POLLUTION LOSS OF AGRICULTURAL LANDS EROSION SALINIZATION DEFORESTATION POLUUTION FROM CHEMICAL AGENTS, INDUSTRIAL SOURCES WATER SUPPLY THREATENED: UNCONTROLLED PESTICIDES, HYDROCARBONS AND HEAVY METALS WATER POOLING ISSUES

COMPETING DEMAND FOR LAND USE CLIMATE CHANGE CONCERNS HIGH RECLAMATION COSTS


APPENDIX – IV INDUSTRY SWOT ANALYSIS

INTERNAL ENVIRONMENT

SWOT Analysis

Gold mining industry

STRENGTHS WEAKNESS

○ Highest proportion of bulls since 2012: Gold expected to rise on bullish market speculations. ○ Demand increasing, 11% in Europe, 6% in Americas and 5% in Asia.

○ Indian restrictions on gold import continue. ○ Bank of America lowered its 2014 gold price forecast by 11% (Indian and Chinese decrease purchase). ○ High redemption in gold products, as per Scotia Mocatta

OPPORTUNITIES THREATS

○ Swiss national bank target: 20% of assets in gold. ○ Valuations of gold miners are approaching their cheapest relative book value in 2 decades. ○ Opportunities for junior miners to acquire mining assets (Northern star purchased Plutonic from Barrick). ○ Recent shift in Canadian policy and its effect on the value of the loonie: weaker currency is required to hasten the rebalancing of the Canadian economy (Canada’s exporting industries, encompassing gold producers, are impacted).

○ Gold and bonds declined in the same year: very rare phenomenon. Most recent memories of such a trend coincided with gold market bottom. ○ Implementation of raw material export tax (mainly on platinum group metals - includes gold). ○ Employment rate in north America (below expectations) --> re-evaluate economic assumptions as a whole and rebalance portfolio.


APPENDIX – V VRIO ANALYSIS

VRIO –GOLDCORP


VRIO Framework - GoldCorp Inc.

Resources Valuable Rare Costly

to Imitate

Supported by the

Organization Result

Tangib

les

Product

Gold Yes Yes Yes Yes Sustained Competitive Advantage (=4Yes)

Copper Yes No No Yes

Temporary Competitive Advantage (=2Yes, 2No)

Silver Yes Yes No Yes

Temporary Competitive Advantage (=3Yes, No)

Zinc Yes No No No Competitive Parity (=Yes, 3No)

Physical

Modern Plant and Facilities Yes No No Yes


Favorable Manufacturing locations Yes No Yes Yes


state of the art machinery and equipment Yes No No Yes


Financial

Cash No No No No Competitive Disavantage (=4 No)

Cash Equivalent Yes No No No Competitive Parity (=Yes, 3No)

Capacity to Raise equity No No No No Competitive Disavantage (=4 No)

Borrowing Capacity Yes No No Yes



Technological

Production Process Yes No Yes Yes Competitive Parity (=Yes, 3No)

Patents, Copyright, Trademark No No No No Competitive Disavantage (=4 No)

Organizational

Strategic Planning Process Yes Yes No Yes


Evaluation and Control System Yes No No Yes


Processes and Procedures Yes No No Yes


Intan

gible

Human

Experience and capabilities of Employees Yes No No Yes


Managerial Skills Yes No No Yes


Trust Yes No No Yes


Innovation and Creativity

Technical and scientific Skills Yes No No Yes


Innovation Capacities Yes No No Yes


Reputation

Brand Name Yes No No Yes


Quality and Reliability Yes No No Yes


Reputation with Suppliers (Fairness and non-zero-sum relationship Yes No No Yes


Industry Analysis - Gold Mining in Canada 31 VRIO – BARRICK GOLD


VRIO Framework - Barrick Gold Inc.

Resources Valuable Rare Costly

to Imitate

Supported by the

Organization Result

Tangib

les

Product

Gold Yes Yes Yes Yes Sustained Competitive Advantage (=4Yes)

Copper Yes No No Yes


Silver Yes Yes Yes Yes Sustained Competitive Advantage (=4Yes)

Zinc

Physical

Modern Plant and Facilities Yes No No Yes


Favorable Manufacturing locations Yes Yes Yes Yes Sustained Competitive Advantage (=4Yes)

state of the art machinery and equipment Yes Yes No Yes


Financial

Cash No No No Yes Competitive Parity (=Yes, 3No)

Cash Equivalent Yes No No Yes


Capacity to Raise equity No No No No Competitive Disavantage (=4 No)

Borrowing Capacity Yes No No Yes



Technological

Production Process No No No Yes Competitive Parity (=Yes, 3No)

Patents, Copyright, Trademark No No No No Competitive Disavantage (=4 No)

Organizational

Strategic Planning Process Yes No No Yes


Evaluation and Control System Yes No No Yes


Processes and Procedures Yes No No Yes


Intan

gible

Human

Experience and capabilities of Employees Yes No No Yes


Managerial Skills Yes No No Yes


Trust Yes No No Yes


Innovation and Creativity

Technical and scientific Skills Yes No No Yes


Innovation Capacities No No Yes No Competitive Parity (=Yes, 3No)

Reputation

Brand Name Yes No No Yes


Quality and Reliability Yes No No Yes


Reputation with Suppliers (Fairness and non-zero-sum relationship Yes No No Yes



BIBLIOGRAPHY

http://www.ukessays.com/essays/economics/pestle-analysis-of-argentina-economics-essay.php

http://prezi.com/s_rge0vhaft4/pestel-analysis-mexico/

http://www.kitco.com/ind/Holmes/2014-01-15-SWOT-Analysis-Gold-Analysts-Most-Bullish-in-a-Year.html

https://www.google.ca/finance?q=TSE%3AG&sq=goldcorp&sp=1&ei=XTjlU4j8N4KuqAHcsIGQAQ

https://www.google.ca/finance?q=TSE%3AABX&sq=barrick&sp=1&ei=AjjlU9ivLITLqAG3vYCQAQ

http://www.ukessays.com/essays/economics/pestle-analysis-of-argentina-economics-essay.php

http://prezi.com/s_rge0vhaft4/pestel-analysis-mexico/

http://www.kitco.com/ind/Holmes/2014-01-15-SWOT-Analysis-Gold-Analysts-Most-Bullish-in-a-Year.html

https://www.google.ca/finance?q=TSE%3AG&sq=goldcorp&sp=1&ei=XTjlU4j8N4KuqAHcsIGQAQ

https://www.google.ca/finance?q=TSE%3AABX&sq=barrick&sp=1&ei=AjjlU9ivLITLqAG3vYCQAQ

industry analysis - gold mining in canada -...

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