Why Did Barrick Sell Off A 25% Stake In The Cerro Casale Mining Project?

by Trefis Team
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Barrick Gold
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Barrick Gold announced the sale of a 25% stake in the Cerro Casale gold and copper mining project to Goldcorp last week, a move that is consistent with the management’s plans for disciplined capital allocation. [1] Goldcorp acquired an additional 25% interest in the undeveloped mining project from Kinross Gold Corporation, post which both Goldcorp and Barrick have a 50% interest in the project. [1] The proceeds from the transaction ($260 million) will allow Barrick to lower its capital expenditure requirements for other major projects. [1]

The company management has emphasized disciplined capital allocation and debt management going forward, as the upside for gold prices remains limited in the near term. [2] Improving economic conditions in the U.S. are expected to temper the investment demand for gold, with the Federal Reserve expected to raise interest rates. Since gold only offers capital gains in terms of returns, rising interest rates tend to make gold less attractive for investors vis-a-vis securities with returns linked to interest rates. With the Fed expected to raise interest rates by an additional 50 basis points in 2017 after its March hike, the investment demand for gold and prices of the metal are expected to remain subdued in the near term. [3] Our forecast for Barrick’s realized gold prices reflects this subdued pricing environment.

With the growth in gold prices expected to remain sluggish in the near term, discipline in capital spending should stand the company in good stead going forward.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Barrick Gold

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Notes:

  1. Barrick Announces Sale of 25 Percent of Cerro Casale and Formation of New Partnership with Goldcorp, Barrick Gold News Release [] [] []
  2. Barrick Gold’s Q4 2016 Earnings Call Transcript, Seeking Alpha []
  3. The Fed’s New Dot Plot, Bloomberg []
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