Barrick Sticks To Disciplined Capital Allocation As Upside For Gold Prices Remains Limited

June 21st, 2017 by Trefis Team

Barrick Gold announced the completion of a 25% stake sale in the Cerro Casale gold mining project to Goldcorp earlier this month, with the two companies (now both holding a 50% stake) looking to jointly develop the Chilean gold mine. [1] The stake sale in the undeveloped gold mine, which would lower Barrick’s capital expenditure commitment towards the development of the project, is in keeping with the company’s strategy of disciplined capital allocation as it seeks to maximize cash flow generation, with the upside for gold prices remaining limited in the near term. [2]

Lower Capital Expenditure Commitment 

Goldcorp acquired a 25% stake in the Cerro Casale project from Kinross Corporation (Barrick’s erstwhile partner in the project which held a 25% stake) in addition to the 25% stake from Barrick Gold, bringing its total stake in the project at par with that of Barrick. Barrick’s stake sale would enable the company to lower its capital expenditure commitments for Cerro Casale by $260 million. [3]

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As a result of steady economic and jobs growth in the U.S., the investment demand for gold as a safe-haven asset is likely to remain subdued. President Trump’s legislative agenda, particularly the infrastructure plan and tax reform, should boost U.S. economic and jobs growth if enacted. In order to ensure price stability amid the improving economic conditions, the Federal Reserve is likely to raise the benchmark interest rate by a cumulative 75 basis points in 2017, before raising rates further in 2018. [4] Should the White House be able to push through its legislative agenda, the likelihood of the Fed following through on its expected rate hike trajectory would increase. Thus, the investment demand for gold is likely to remain subdued in the near term, which is expected to translate into weak growth in gold prices, as illustrated by the chart shown below.

Besides lowering its capital expenditure commitment, bringing on board a partner with an equal stake in the development of the Cerro Casale project could also help Barrick spread the risk of adverse legal developments scuppering the Chilean gold mining project. Barrick Gold’s Pasuca-Lama project, located on the Chile-Argentina border, has been held up for a number of years amid legal challenges over alleged environmental infractions. Given that the company’s Pasuca-Lama project is currently in limbo, lowering its exposure to Chilean jurisdiction is an additional advantage of the company’s stake sale in the Cerro Casale project. Thus, the recently concluded stake sale, in keeping with Barrick’s strategy of disciplined capital allocation, could also help lower the risk in the company’s mining portfolio.

Have more questions about Barrick Gold? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such 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 Completes Sale of 25 Percent of Cerro Casale to Goldcorp and Forms New Joint Venture, Barrick Gold Press Release [↩]
  2. Barrick Gold’s Q1 2017 Earnings Call Transcript, Seeking Alpha [↩]
  3. Barrick Announces Sale of 25 Percent of Cerro Casale and Formation of New Partnership with Goldcorp, Barrick Gold News Release [↩]
  4. The Fed’s New Dot Plot, Bloomberg [↩]