Barrick Gold (ABX) is a multi-national gold mining company. It is currently still the largest gold miner by annual output and the second-largest by market capitalization. The company has been struggling lately and has announced plans to streamline its asset portfolio. First up on the chopping block were three Western Australian mines called Darlot, Granny Smith and Lawler, collectively known as the Yilgarn South assets. A few days ago Barrick Gold announced that it has agreed to divest its Yilgarn South assets to Gold Fields Limited (GFI).
These three mines produced 452,000 ounces in 2012, and 196,000 ounces in the first half of 2013 at an all-in sustaining cost of $1,137/ounce. These costs are above Barrick's company-wide average of $919/ounce but still near the industry-wide median. Furthermore, reserves of 2.6M ounces are documented for these mines.
Gold Fields agreed to pay a consideration valued $300M. Half of this price will be paid in cash, the other half can be paid in Gold Fields' shares. The transaction is expected to close on October 1. Barrick plans to use the proceeds for general corporate purposes and debt repayment.
Gold Fields already owns the Agnew mine which is situated adjacent to the Lawlers mine and has already noted the potential for synergies between these two assets. On completion of the deal, Australia will represent Gold Fields' largest regional production center with 42% of total production.
There has been quite a bit of corporate action in the Australian gold mining sector during the past year:
- Shandong Mining took control of Focus Minerals (OTC:FKSMF).
- Zijin Mining purchased a majority stake in Norton Gold Fields (OTC:NGLDF).
- Another Chinese investment concerned the acquisition of St Barbara's (OTC:STBMF) Southern Cross mine by Hanking Gold Mining.
- Most recently, Alacer Gold (OTCPK:ALIAF) sold its 49% stake of the Frog Leg's mine to La Mancha Resources (OTC:LACHF).
The latter of these transactions is closest in nature to the deal struck between Barrick and Gold Fields and suitable for comparison. Here are some of the details: La Mancha paid $144M cash for attributable 53,640 ounces of annual gold production and 370,000 ounces in attributable reserves. Cash costs at the Frog's Leg mine were reported at $886/ounce, unfortunately no all-in sustaining costs are reported for the Frog's Leg mine.
At present spot price the Yilgarn South mines have a margin of around $200/ounce based on all-in sustaining costs. Assuming constant production and no further resource conversion the Yilgarn South assets could operate for 5.7 years just on currently reported reserves. Considering a discount of 12% per annum we computed the net present value of production from reserves only to $401M. Gold Fields is paying $300M, or 75% of this NPV (12%) estimate. In this model Yilgarn South will pay for itself within less than four years.
Using the same assumptions for the Frog's Leg sale, we compute an NPV (12%) of $54M for which La Mancha paid $144M (or a premium of 170%).
Valuation on reserves and resources paints a similar picture. We used a formula to compute an overall representative reserve described here and divided the purchase price by this representative reserve. Gold Fields paid $115 per ounce in the ground, La Mancha paid $370.
Gold Fields struck a very opportunistic deal and has bought value for comparatively little money. These mines are situated in a safe jurisdiction, have an experienced work force and have been cash flow positive throughout the recent downturn in gold price. Chances are that Barrick has sold these assets at the very bottom of the gold price correction (but we may end up eating our words to this regard).