Why Barrick’s Deal With Shandong Makes Sense

by Trefis Team
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Barrick Gold has signed an agreement with China’s Shandong Gold Group for the sale of a 50% stake in the company’s Veladero mine, located in Argentina. [1] Further, Barrick and Shandong will explore the possibility of joint development of the stalled Pascua-Lama project, located on the Chile-Argentina border, in addition to exploring other investment opportunities in the region. [1] Part of the proceeds of the stake sale in the Veladero mine could be used for lowering Barrick’s debt burden, as promised by the company management in its Q4 earnings conference call. [2] Moreover, the possibility of joint development of the Pascua-Lama project would allow Barrick to share the risks of developing the stalled project with Shandong.

Barrick’s Pascua-Lama project has been mired in legal uncertainty since 2013 when a Chilean court order forced the company to stop construction activities at the mine for alleged environmental infractions. [3] While there have been encouraging legal developments for the company since then, the resumption of construction activities at the mine is not certain. In this context, a potential agreement for joint development of the mine with Shandong could help the company share, and thus partially offset, the risks, particularly legal and regulatory, associated with the development of the mine.

Barrick’s agreement for a stake sale in the Veladero mine follows closely on the heels of a stake sale in the company’s Cerro Casale project, announced towards the end of last month, which made Goldcorp a joint venture partner for Barrick in the mining project. [4] In addition to lowering its project risk by getting joint venture partners on board, these stake sales will allow Barrick Gold to lower its capital expenditure commitments as well. Lowering capital spending will stand the company in good stead as the upside for gold prices remains limited in the near term. A strengthening U.S. economy and job market is expected to translate into two additional 25 basis points rate hikes by the Fed over the course of the year, in addition to the March rate hike. [5] Rising interest rates are likely to dampen the growth in gold prices, as illustrated by our realized price forecasts for Barrick Gold.

Thus, the aforementioned steps taken by Barrick Gold’s management will put the company in a good position to tackle a potential period of weak gold prices.

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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 Strategic Cooperation Agreement with Shandong Gold, Barrick Gold News Release [] []
  2. Barrick Gold’s Q4 2016 Earnings Call Transcript, Seeking Alpha []
  3. Barrick Gold’s 2016 40-F, SEC []
  4. Barrick Announces Sale of 25 Percent of Cerro Casale and Formation of New Partnership with Goldcorp, Barrick News Release []
  5. The Fed’s New Dot Plot, Bloomberg []
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