Barrick Gold Corporation (NYSE:ABX), 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 announcement. ((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 Mines, Barrick Gold Press Release))
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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 costs. 
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 Spending
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 corporate governance 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.Notes:
- Barrick Announces Agreement to Divest Plutonic Mine in Australia, Barrick News Release [↩]
- Barrick Gold Looks to Sell Two Australian Mines, WSJ [↩]
- Barrick Gold 6-K, SEC [↩]
- Barrick Gold 2012 40-F, SEC [↩]
- African Barrick Gold Changes CEO; Barrick Gold Sells Australian Mine, Barron’s [↩]
- Barrick Gold to cut layer of management, Financial Times [↩]