On May 8 Barrick Gold (ABX) concluded negotiations with the Dominican Republic to amend the SLA (Special Lease Agreement) governing operation of its huge mine at Pueblo Viejo ($4 billion invested so far). ABX owns the site 60-40% with Goldcorp (GG). The two companies are the largest gold miners in the world: ABX has proven and probable reserves of about 250 million oz/Au and produces about 7.3 million/oz annually. GG has reserves of 67.7 million oz/Au and an annual production of 2.95 million oz. Per the amended SLA, the Dominican will receive an additional $1.5 billion during the life of the mine (about 25 years) with most of the addition front-loaded, providing revenues of about $2.2 billion from 2013-2016. Barrick will pay the Dominican a corporate tax of 25% and net profits and royalty totaling 30.9% of mine income. The deal is pending pro forma approval of the Boards of ABX and GG.
ABX thus has resolved a simmering crisis that had clouded the outlook for this enormous project (one of the largest gold, silver and copper mines in the world), driven off investors and crushed sentiment, estimates and share price. Goldcorp rose 6.36% Wednesday while ABX rebounded 8.46% on heavy volume, 33% above average, which has grown to 18.67 million shares/day after the April 10 suspension and subsequent uncertainty over the Pascua Lama project in Chile as well as the tensions around Pueblo Viejo. On Thursday mid-day, ABX sustained its rise, up 1.12% while GG was very strong at 1.67%. Another positive was that on May 2 ABX completed a bond float of $2.5 billion with nearly half of payment deferred until 2043. This extended period will limit the impact on profitability which with cash flow from PV (Pueblo Viejo) contributing significantly.
The news on Pueblo Viejo was reported by Reuters and later Yahoo Finance and its positive ripple effects likely will help lift the PM mining sector, which surged Wednesday. On Thursday the Silver Miners ETF (SIL) and Gold miner (GDX) and junior Gold miner (GDXJ) extended the gains of May 08. The long-term positive impact for ABX should be considerable: in its first five years of production, ABX expects PV to produce about 650k oz/Au annually at a very low cash cost of $300-350/oz. First ore concentrate was produced in August 2012 and increased in January 2013.
Barrick's problems in the Dominican and Chile have made the company with its huge reserves a good value play, a status enhanced by recent developments. In addition to the resolution at PV and Reko Diq, these include Barrick's appointment of senior Chilean mining officials to corporate positions empowering them to interface with Chile's government and address environmental concerns on Pascua Lama. This and the Pueblo Viejo deal are a template that can support growth going forward. ABX should note the example of First Majestic Silver (AG) in using citizens from the host country in management and liaison positions and in configuring its sites as centers for community development. This could do much to defuse forms of opposition to mining usually termed "resource nationalism" but that comes from many sources: indigenous, external and competitors. A window on that situation may be glimpsed through the problems Tahoe Resources (TAHO) faces at its Escobal site in Guatemala.
Also on May 08 ABX and its partner, Antofagasta Copper (OTC:ANFGF), a Chilean company formally announced the termination of the huge Reko Diq project in Pakistan. Work had been suspended by a regional court in Baluchistan in 2011 and early this year a Pakistani court quashed it altogether. But closure and clarity on the situation awaited a formal response and withdrawal by Barrick and Antofagasta who say they will take their claim for monetary damages from lost investment and profits to international arbitration. Closure on the situation, whose problems have been priced in, will lift ABX.
ABX has soared on the news regarding the two sites. The relief was in synergy with a big day for miners generally and precious metal miners particularly. On May 08 gains of 6 -10% were common in the despised sector which is ripe for secular rotation and heavy value buying. The valuations of nearly all PM miners are extraordinary now, some being priced below their cash on hand as explained by Lawrence Roulston below. This extreme imbalance between value and share price will not last although one must be mindful of the sector's volatility and consider most companies as trading vehicles. This is true even in cases where one will exit and re-enter after the periodic periods of negative sentiment such as has characterized 2013 YTD.
Here are observations on value in a May 08 interview with the Au Report from Lawrence Roulston, a geologist with training in engineering and business and three decades involvement in assessing PM miners:
"Let me put the current valuations into perspective: I've never seen anything like this in the over 30 years I've been in the business. The valuations are irrational. Companies are trading at discounts to book, sometimes at a third of the value of their cash in the bank. There are companies with multi-million ounce gold deposits trading at just slightly over the value of cash in the bank and, in some cases, even less than the value of cash in the bank. You could buy cash at a discount and get a gold deposit or a copper deposit thrown in for free. The profit potential is enormous for anybody who has cash and is coming into the market now…"
That is a powerful message. Strong growth in the past 10 days in miners generally may be reflected soon in undervalued PM miners. The ABX settlement in the Dominican may soothe extremely negative sentiment. Note that while GG has a cleaner balance sheet with less leverage, Barrick leads in major miner valuation with a P/B of 0.9 and a Price/Cash Flow of 3.8 both of which compare favorably to industry leaders like Freeport McMorRan (FCX) and Newmont Mining (NEM). ABX also yields a 4.1% dividend and its core operations are in Nevada which Fraser ranks as the world's seventh best mining jurisdiction.
People who are holding PM mining stock purchased the past two years are hurting but given the improving situation should avoid locking in losses. For new entrants or for those underweighted or those who have investable cash this sector invites investment. Familiarize yourself with some companies and price history and stake a claim. For example, First Majestic noted above has analyst estimates of 104% growth in 2014. The good news for ABX unlocks the values hidden in a crushed PM Mining sector and indicates strategies to reduce frictions that sometimes impede future development.