Why Barrick Is Selling The Cowal Mine

May 26th, 2015 by Trefis Team

Barrick Gold Corporation (NYSE:ABX), the world’s largest gold producer, has announced that it has reached an agreement for the sale of its fully-owned Cowal gold mine to Evolution Mining for $550 million in cash. [1] Located in New South Wales, Australia, the Cowal mine is one of Barrick’s low-cost gold mines. Despite that, the company has decided to sell off the mine, with debt reduction and a greater focus on its American gold mining operations constituting Barrick’s strategy going forward. In this article, we will take a look at why Barrick Gold has decided to sell off the Cowal mine.

Gold Prices

(Gold Prices in 2014, Source: Kitco)

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(Gold Prices in 2015, Source: Kitco)

Gold prices have fallen over the course of the last year, reacting to cues pertaining to the tapering of the Federal Reserve’s Quantitative Easing (QE) program. Gold as an investment is often viewed as a hedge against inflation and economic weakness. The tapering of QE implied strengthening U.S. economic growth, which reduced the investment demand for gold and led to a fall in prices of the metal. Going forward, the Fed’s outlook on the U.S. economy is important as far as gold prices are concerned. With the economy strengthening, the Fed is expected to raise interest rates sometime in 2015. [2] However, the exact timing of an interest rate hike is contingent upon the pace of economic and jobs growth in the U.S. [3] An interest rate hike is likely to limit the upside to gold prices, as investors shift towards higher yielding assets.

The subdued gold pricing environment was reflected in Barrick’s Q1 results. The company’s average realized price for gold sales stood at $1,219 per ounce in Q1 2015, around 5% lower as compared to the average realized price in the corresponding period of 2014. [4]

Divestment of Non-core Assets and Debt Reduction

Given that low gold prices are expected to persist in the near term, the company is looking for ways to boost its financial flexibility in order to operate competitively in a subdued gold pricing environment. Barrick Gold intends to focus on its mining operations in the Americas going forward. The company management is of the opinion that Barrick’s technical and exploration expertise and partnerships with host governments give it a competitive advantage in Nevada and the Andean region of South America. [5] These regions account for a majority of Barrick’s operations, with over 80% of the company’s proven and probable gold reserves located in the Americas. [6] Most of Barrick’s low-cost mines are also located in the Americas. Thus, the company is looking to selectively divest its assets located in other parts of the world, which in some cases would help it lower its average costs of production.

Since mid-2013, the company has reduced its portfolio of mines from 27 to 19. [7] These include the sales of the Darlot, Granny Smith, Lawlers, Plutonic, and Kanowna mines in Australia, the Tulawaka mine in Tanzania, the Marigold mine in Nevada, and the closure of the Pierina mine in Peru. Further, the company also sold a 10% equity stake in its subsidiary, African Barrick Gold. [8] Lastly, the company also sold off its oil and gas business, namely Barrick Energy, in 2013. The combined proceeds of these asset sales total approximately $1 billion. [7] The focus of the company’s portfolio optimization efforts has been getting rid of its high-cost, non-core mines. This is reflected in the All-in Sustaining Cost (AISC) metric for these mines. The AISC metric includes the total cash cost, sustaining capital expenditures, general and administrative costs, minesite exploration and evaluation costs, mine development expenditures, and environmental rehabilitation costs. It provides a comprehensive view of costs related to a company’s current mining operations. In 2013, the AISC figures for the Australia Pacific mines segment, African Barrick Gold, and the Pierina mine, stood at $994 per ounce, $1,362 per ounce, and $1,349 per ounce, respectively. The reportable segment of North American mines, which includes the Marigold mine, reported an AISC of $1,235 per ounce. All of these figures are higher than the company-wide AISC of $915 per ounce for Barrick’s gold mining operations. Asset sales helped lower Barrick’s AISC for its gold mining operations from $915 per ounce in 2013, to $864 per ounce in 2014. [5]

The sale of the Cowal mine is a continuation of the company’s strategy to reduce its footprint outside of the Americas. However, in this case, it is one of Barrick’s low-cost gold mines with an AISC of $787 per ounce in 2014, as compared to $825 per ounce for the company’s overall gold mining operations. [9] Barrick intends to use the proceeds from the sale of the Cowal mine for the reduction of its debt. It has a $3 billion debt reduction target for 2015, as it looks to adapt to an environment of low gold prices. [10] The company’s net debt stood at $10.4 billion at the end of 2014 and around $10.6 billion at the end of Q1 2015. [4] Thus, the proceeds from the sale of the Cowal mine will go some way towards achieving the company’s debt reduction target. Barrick Gold is also looking for ways to offload its Porgera mine, which is also located in the Australia Pacific region, as it seeks to reduce its operational footprint outside the Americas.

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Notes:
  1. Barrick Announces Agreement to Divest Cowal Mine, Barrick Gold News Release [↩]
  2. Janet Yellen: Fed on Track to Raise Rates This Year, Wall Street Journal [↩]
  3. Investor Expectations for Fed Rate Increase at June 2015 Meeting Slip, Wall Street Journal [↩]
  4. Barrick Gold’s Q1 2015 Earnings Release, SEC [↩] [↩]
  5. Barrick Gold’s Q4 2014 Earnings Release, Barrick Gold Website [↩] [↩]
  6. Barrick Gold’s 2014 40-F, SEC [↩]
  7. Barrick Gold’s Q4 2013 Earnings Presentation, Barrick Gold Website [↩] [↩]
  8. Barrick Completes Partial Divestment Of African Barrick Gold Plc Holding, Barrick Gold News Release [↩]
  9. Barrick Gold’s 2014 20-F, SEC [↩]
  10. Barrick Gold’s Q1 2015 Earnings Call Transcript, Seeking Alpha [↩]