Barrick Announces Sale Of Australian Assets To Cut Costs And Debt

August 26th, 2013 by Trefis Team

Barrick Gold Corporation (NYSE:ABX), the largest gold producer in the world, has announced the divestment of its Yilgarn South gold mining assets in Australia to Gold Fields Limited for a total consideration of $300 million. The amount is subject to certain closing adjustments. The Yilgarn South assets include the Granny Smith, Lawlers and Darlot mines and produce around 450,000 ounces of gold per year. [1]

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 said that the sale will not impact its 2013 production guidance of 7.0-7.4 million ounces of gold. [2]

The sale will lower Barrick’s operating expenses and rid it of high cost mines with short remaining lives. Also, it will free up management time and enable executives to concentrate on other important operations. The proceeds of the sale will be used for general corporate purposes, including the repayment of the company’s hefty debt. The transaction is expected to close on October 1, 2013 and will be recorded in the fourth quarter. [3]

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See Full Analysis for Barrick Gold Here

Why Is Barrick Gold Selling These Mines?

1) Cost Of Production Is High At Yilgarn South

The Yilgarn South mines produced 452,000 ounces of gold at an all-in sustaining cost (AISC) of $1,137 per ounce in 2012 and 196,000 ounces of gold at an AISC of $1,145 per ounce in the first half of 2013. In the second quarter of 2013, Barrick reported a company-wide AISC figure of $919 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. [4]

The mines at Yilgarn South contained proven and probable reserves of 2.6 million ounces, measured and indicated resources of 0.6 million ounces and inferred resources of 1.2 million ounces as on December 31, 2012. The output accounted for 6% of Barrick’s total production in 2012 and less than 2% of its total proven and probable reserves at the end of 2012. [5]

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 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 of the company 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 off assets which consume capital without generating commensurate returns.

Interest costs are another drag on earnings since Barrick has a net debt of around $11.6 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. [6]

The sale of the Yilgarn South Assets will be used to repay a portion of Barrick’s debt. The exact amount hasn’t been disclosed yet. This objective may have spurred Barrick to accept a relatively lower valuation for its assets. According to some analysts, the mines being sold for $300 million are actually worth $513 million. Barrick’s sale price values the Yilgarn South assets at $115 per ounce of gold, which is much lower than the average valuation of $280 per ounce for its North American assets.

We have a price estimate for Barrick Gold of $15 after the second quarter earnings results.

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Notes:
  1. Barrick Reaches Agreement to Divest Three Australian Mines, Barrick Press Release [↩]
  2. Gold Fields to Buy Barrick Mines in Australia After Loss, Bloomberg [↩]
  3. Barrick sells three mines in Australia to South Africa’s Gold Fields, The Globe And Mail [↩]
  4. Barrick Gold To Divest Yilgarn South Assets In Western Australia To Gold Fields, RTT News [↩]
  5. Barrick Mine Sale Shows Australian Gold Still Has Appeal, WSJ [↩]
  6. African Barrick Gold Changes CEO; Barrick Gold Sells Australian Mine, Barron’s [↩]