ROB Insight is a premium commentary product offering rapid analysis of business and economic news, corporate strategy and policy, published throughout the business day. Visit the ROB Insight homepage for analysis available only to subscribers.
Is the tarnish finally off Barrick Gold Corp.? After plumbing its lowest level in more than 12 years last month, the stock is up more than 40 per cent following a series of moves to strengthen its balance sheet, including the sale of three mines in Australia to Gold Fields Ltd. announced Thursday.
The stock is still well off 52-week highs and lagging its senior gold peers, Newmont Mining Corp., Goldcorp Inc. and Kinross Gold Corp., but Barrick is doing the right things to dig itself out of a hole that is in good part of its own making. Now it just needs the gold price to co-operate.
The sale of Barrick's Yilgarn South assets in Western Australia is the kind of deal that investors have been looking for. These three mines are marginal assets and also relatively expensive properties to maintain and make more sense for an owner with other assets nearby. Barrick will get $300-million, about equal to net asset value, according to RBC analyst Stephen Walker, though it would have been better to see Barrick get all cash, rather than up to 50 per cent in shares. Given it is a buyer's market, it could have been worse. "This shows there is a market [for gold assets], and prices aren't too bad," said Veritas Investment Research analyst Pawel Rajszel."
It's one more positive step in the continuing financial triage at Barrick. The miner has recently cut its dividend, sold its Barrick Energy subsidiary, slowed the development of its troubled Pascua Lama mine in the Andes, and slashed budgeted capital and costs by $2-billion. Now, Barrick's strengths are starting to shine through: an investment-grade credit rating, improved focus, and a declining cost base that makes it one of the lowest-cost senior gold producers, according to TD Securities analyst Greg Barnes.
Furthermore, the Australian transaction points to more pruning ahead. The Yilgarn South operations were among a list of assets which, due to their higher costs, Barrick had slated to either scale back, close or sell. All told, it wouldn't be surprising if Barrick brings in another $1-billion in proceeds by further trimming its vast portfolio.
If Barrick can divest all of its 12 high-cost mines, Mr. Barnes estimates the company would become much more profitable, shaving more than 20 per cent off its average cost per ounce.
Even without more divestitures, though, Barrick seems able to withstand further weakening in the gold price, if not an outright crash. Mr. Barnes estimates that if gold holds at $1,300 (U.S.) an ounce, Barrick should have enough cash to cover its capital costs, keep $1-billion in the bank and not touch its $4-billion in lines of credit. It would take an average price of $1,000 for the company to exhaust its credit lines, not including any further cuts to costs, dividends or mining operations.
That's a long way for the price of gold to fall from present levels before things start to get uncomfortable. With most other gold companies also either acting rationally or getting there, no wonder a growing number of value investors are eyeing the sector with interest.
Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Sean on Twitter at @seansilcoff.