Barrick Gold Corporation
), the largest gold producer in the world, has announced that it
has sold its Plutonic gold mine in Western
Australia to Northern Star Resources Limited for $22
million. The amount is subject to certain closing adjustments.
The transaction will be recorded in the company's accounts in the
first quarter of 2014 as it is expected to close in February.
The sale is in line with Barrick Gold's announcement of asset
sales in its second quarter earnings conference call. The company
had said that it will look at selling, closing or reducing output
at 12 of its 27 mines where production costs exceed $1,000 per
ounce of gold. Barrick had also stated that it is looking to either
optimize the mine plan at Plutonic or divest it. It has already
sold its Yilgarn South assets for $300 million after this
Barrick Gold Q2 2013 Earnings Conference Call
, Seeking Alpha))
The sale will lower Barrick's operating expenses and rid it of
non-core, high cost mines with short remaining lives. It will also
free up management time and enable executives to concentrate on
other important operations. The proceeds of the sale are likely be
used for general corporate purposes, including the repayment of the
company's hefty debt. ((
Barrick Completes Divestiture of Three Australian
, Barrick Gold Press Release))
See Full Analysis for Barrick Gold Here
In September, there was market speculation that Barrick had
hired UBS AG and Bank Of America Merrill Lynch to find buyers for
its Kanowna Belle and Plutonic mines in western Australia. At that
point, Barrick had declined to confirm speculations but the
statement released by the company after the Plutonic deal confirms
that the above mentioned firms advised it on the sale.
Why Sell Plutonic?
1) Cost Of Production Is High
The Plutonic mines produced 86,000 ounces of gold at an all-in
sustaining cost (AISC) of $1,110 per ounce in the first nine months
of 2013. For the first nine months of 2013, Barrick reported
company-wide AISC of $919 per ounce and the figure for the whole
year is expected to be between $900-975 per ounce. The company's
Australian operations are among some of its costliest. Amid falling
gold prices, costs have soared by nearly 20% last year. The
strength of the Australian dollar is only adding to mining
companies' woes as a strong Australian dollar results in higher
The Plutonic mine contained proven and probable reserves of 0.2
million ounces, measured and indicated resources of 0.8 million
ounces and inferred resources of 1 million ounces as on December
31, 2012. Considering Barrick's total production of more than
7 million ounces in 2012 and total proven and probable reserves of
more than 110 million ounces, the contribution of Plutonic is quite
minuscule and selling it will not have much impact on its total
production. On the other hand, selling high-cost assets will help
the company reduce expenses and thus the closely watched AISC
metric. This would be in line with Barrick's declared intention to
focus on returns and not growth in production.
2) Barrick Wants To Reduce Debt And Curb
Due to the steep fall in gold prices earlier this year, Barrick
Gold was forced to record impairments worth $8.7 billion in the
second quarter. With the cost of production ballooning, the company
wants to reshape its portfolio and focus on generating returns
rather than increasing production. Investors are not happy at the
nosediving stock price and the reduction in dividend by 75%.
Barrick aims to trim $1.5-1.8 billion in costs over 2013 and 2014
by cutting capital spending and reducing staff strength. Capital
spending can be reduced optimally by selling assets which consume
capital without generating commensurate returns.
Interest costs are another drag on earnings since Barrick has
long term debt of around $14.6 billion on its balance sheet. The
high debt is largely a result of its Equinox acquisition in 2011.
Considering the disappointing performance of the acquired assets,
Barrick seems to have grossly overpaid.
The importance of cost-cutting for Barrick cannot be emphasized
enough. Strident criticism from irate shareholders in recent months
has pushed Barrick into changing its management structure and
practices to display seriousness about cost-cutting.
Barrick doesn't give a value for the Plutonic mine in its
financial statements. When the speculation about a possible sale of
Plutonic broke out first, some analysts had said that it may fetch
Barrick anywhere between $44-77 million. However, considering that
the sale price stands at $22 million only, these expectations have
been belied. The actual realizations were much lower than expected
even when the company sold its Yilgarn South assets at a steep
discount. According to analysts, the assets sold for $300 million
were actually worth more than $500 million. We think that the
buyers were wary of paying a fair value price for Plutonic and
Yilgarn South assets owing to the high cost of production and the
bleak outlook for gold prices in 2014 as the QE tapering is
expected to continue.
We have a price estimate for Barrick Gold of $15, which
represents 12% downside to the current market price.
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