Barrick Gold (TSX: ABX; NYSE: ABX) is selling half of its Veladero gold mine in Argentina to Shandong Gold Group for US$960 million, as part of a strategic cooperation agreement with China’s leading underground mining firm.
The agreement calls for the companies to examine jointly developing the suspended Pascua-Lama gold project, and further examine investment opportunities on the prospective El Indio gold belt on the border of Argentina and Chile, which hosts Veladero, Pascua-Lama and Barrick’s Alturas gold exploration project.
“Shandong is an ideal partner to help us unlock the untapped mineral wealth of the El Indio belt over the long-term, while working with us to generate more value from the Veladero mine,” Barrick’s executive chairman John Thornton said in a release.
Barrick and Shandong began talks in April 2016.
“While we are giving up 50% of the cash flows from Veladero in the short-term, we are receiving US$960 million in cash and gaining a partner with the potential to join us in future developments in the region, sharing capital and expertise,” Barrick spokesperson Andy Lloyd said in an email.
Haywood Securities analyst Kerry Smith says Barrick is getting a “premium price” for the Veladero mine in San Juan province. He values the company’s 100% interest in the oxide heap-leach mine at US$1.6 billion (using a US$1,250 per oz. gold price). Based on this valuation, Barrick is getting a 24% premium.
The deal, Smith notes, would likely have Barrick lose 7% of its consolidated 2017 production and resultant cash flow, which he argues is a “modest price to pay for the opportunity to find a way to develop Pascua-Lama and Alturas in a cost-effective way.”
BMO analyst Andrew Kaip agrees that at first glance the transaction offers “attractive deal metrics for Veladero on a stand-alone basis,” and that the potential of codeveloping Pascua-Lama further de-risks the asset. However, he cautions that “giving up an interest in future opportunities in the El Indio belt is potentially one step too far, and lowers exposure to long-term future optionality for shareholders.”
In response, Lloyd says that “any decision to jointly develop Pascua-Lama or other projects would be subject to future agreement and investment … we’re not giving anything up, we are crystallizing value from Veladero while gaining a partner for future developments in the region, and that has significant value for our owners, as we seek to grow our free cash flow per share over the long-term. We would argue this actually increases the long-term optionality of our portfolio, because we can do more with a partner in this region than we could ever do on our own.”
Earlier this year, Barrick began a prefeasibility study for a 15,000-tonne-per-day underground operation on the Argentine side of the stalled Pascua-Lama project. “Shandong will now embed a team of specialists in the process. Only when this is complete can we talk about what a future development might look like,” Lloyd notes.
Smith adds that the “bigger prize here is potentially bringing Shandong Gold in as a partner to develop and share the financial and execution risk of building out Pascua-Lama.”
The strategic cooperation agreement should close at the end of June, after which Barrick and Shandong will create a joint-venture board, consisting of three members from each company to overlook the Veladero mine. The mine’s current management team will remain in place.
On March 30, the San Juan government temporarily restricted using cyanide at the mine’s heap-leach facility until Barrick finishes remedial work, after a recent leak in a pipe carrying gold-bearing solution on the leach pad. Barrick says all the solution was contained within the site and that it is completing the remediation, adding that this should not affect its 2017 gold guidance. The mine should produce 770,000 to 830,000 oz. gold this year at all-in sustaining costs of US$840 to US$940 per ounce.
Barrick will use most of the proceeds from the transaction to pay down debt. The miner ended 2016 with US$7.8 billion in debt. It intends to lower this by US$2.8 billion at the end of 2018, with US$1.5 billion of the reduction planned for this year.
Barrick closed April 6 relatively flat at $25.87 per share.