Barrick-China Deal Big Win For Gold: USD Rise Veils Precious Metals Sector Strength

| About: Barrick Gold (ABX)
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The most significant event for currencies, global commerce, markets and economies on May 10 was the intent of Barrick Gold (NYSE:ABX) to sell three of its Australian mining properties to Zijin Mining, China's largest gold and copper miner. ABX has engaged BOFA -ML (Bank of America - Merrill Lynch) to execute the sale. This is another positive for ABX in a week of constructive events I discussed here. This news however was obscured by Friday's drop and recovery of the indices, spot bullion and PM (precious metal) miners which as in pre-POMO times acted inversely to Dollar strength. The USD had a lively and influential week that showed the power of fiat currencies to dominate economic news and markets. In this case it veiled the improved climate and strategic approach of ABX and the PM mining sector

After a small dip Tuesday and a sharp drop Wednesday, on May 09- 10 the DXY index rose almost vertically from 81.80 to 83.396 at 11:16am Friday. In the classic inverse correlation of the USD to gold, spot bullion and PM (precious metal) miners sagged to daily lows as the dollar rose. The USD surge put the DXY in the top 14% of its 52-week range and near its March YTD peak. As the DXY fell during the afternoon toward its close at 83.147 the indices and metals recovered to end mostly green. The Junior Gold Miners (NYSEARCA:GDXJ) rose, closing +.58% while GLD rose off its low to close -.84%. Gold bullion closed down $8/oz at $1448, $27 above its morning low. Silver behaved similarly, rising .58 from its low to close green at its high of $23.84/oz. Before it faded, the USD push blunted the indices, PM Miners and giant mixed commodity miners most of all. Despite Copper's (NYSEARCA:JJC) 1.48% rise major miners BHP Billiton (NYSE:BHP), Rio Tinto (NYSE:RIO), Southern Copper (NYSE:SCCO) and Vale (NYSE:VALE) fell -.60 to -2.19%. It was notable that ABX with its enormous copper reserves (13.9 trillion lbs) ended the day even. So did Goldcorp (NYSE:GG) its partner in Pueblo Viejo in the Dominican and also a significant producer of Copper with reserves of 5.76 trillion lbs. The two main PM miners outperformed the mixed commodity giants which suggests continuing uncertainty about global growth.

While the 2-day DXY surge largely reflects devaluation of the yen and EURO whose continuing "accommodative" direction was announced last week it bled some water from the indices and held PM prices in line with GS guidance of gold $1450/oz for 2013. It also created buying opportunities as Sovereigns bought 40 tons of gold during the Friday morning low. The not-so-hidden hand worked and gold closed as if by magic at $1448/oz: fiat lux. It was like a lesson that a weaker USD is good for business, markets and gold: message sent, message received.

Barrick's continuing effort to streamline operations and cut capex was signaled by events throughout the week. The resolution of its newly amended special lease agreement for Pueblo Viejo was celebrated Friday in Dominican media which augurs well for operations in future. Though achieved by agreeing to nearly 51% total tax and royalties the clarity provided by the amended lease is a positive for ABX and its investors, securing 15 million proven oz gold reserves, about 650k oz gold annually for the life of the mine.

But the story with the greatest macro-economic, financial and geopolitical import was the news about Zijin Mining's interest in Darlot, Granny Smith and Lawlers, three of Barrick's nine Australian properties. Barrick's Australian sites are its second most costly operating segment (all-in sustaining costs of $1050/oz gold) and a sale would confirm CEO Jamie Sokalsky and his Board's decision to cut costs and concentrate on Barrick's most profitable mines. The resource of the entire Australia-Pacific region is substantial: 16.6 million oz proven and probable gold reserves with 2012 production at 1.82 million oz Au. The mines on which Zijin is bidding compose Barrick's Yilgarn South region in the vast province of Western Australia. In 2012 Darlot, Granny Smith and Lawlers together produced 452k oz gold from 2.59 million oz proven and probable reserves with Granny Smith being the major site at this time.

Dianmin Chen who worked for ABX Australia through 2007 is head of Norton Gold Fields (NGF.AU) which Zijin bought for $229 million in August 2012 to serve as its base for acquisitions of Australian PM mining companies and related assets. NGF last month bought Kalgoorlie Mining (KMC.AU), a former ABX property for $15 million. NGF forecasts about 160k oz gold production from its Paddington Mine in Western Australia province for 2013. It is just the start of Chinese investment in development of Australian properties, and its context includes Chinese-Australian ex-USD trading agreements announced April 8. Westpac and ANZ banks now handle business between Australian and Chinese companies in Australian dollars and RMB.

CB and private investor and jewelry demand in China is far outstripping supply as I described recently and Chinese companies are increasing exploration, development and acquisition projects. Meanwhile Western companies are deleveraging in the wake of falling PM prices pushed downhill by the Goldman Sachs low ball gold estimate for 2013-14 and even more by their April 10 call to short sell gold contracts on COMEX. Thus, Western investors and mining companies are selling low while the Chinese see value and are buying. For example, Barrick attempted to sell African Barrick Gold (ABG) to China National Gold Group (OTC:CGDC) but talks broke down in January when the parties could not agree on price for the four mines in Tanzania. This would have been China's largest commodity acquisition to date. ABG was downgraded May 3 (to "sell/neutral" by GS) and given ABX's strategic focus the deal may be revisited. A sale would enhance Barrick's flexibility to make a deal with Chile about Pascua Lama while also making it more important to the company. It has retained two senior Chilean mining executives, Marcelo Awad and Eduardo Flores to facilitate this resolution. But the key macro issue involving Chinese growth and gold's role in the world financial structure is primary.

As Stephen Bell wrote in the Money Beat article, "Chinese companies are stepping up deal activity in the gold sector, just as many of their biggest Western rivals take a more cautious approach to spending in the wake of a 13% fall in prices of the precious metal since the end of last year." Most of this decline followed the Goldman 4-10 guidance which for China signaled a time to increase buying PM assets.

Through NGF which it owns 89%, Zijin is intensifying its policy of acquisition and expansion. On March 20, Zijin and Sprott Asset Inc formed a $500 million dual trading facility to trade equity and debt instruments related to PMs, copper and minerals. This is part of China's push to own major commodity sites worldwide. I noted the African part of this agenda here and the RMB exchange privileges China has given large companies like Intel (NASDAQ:INTC), Caterpillar (NYSE:CAT) and Shell (NYSE:RDS.A) here.

My next piece will look at the slump of the great basic materials and commodity producers and consider what this hints about the staying power of the markets. What is clear is that Zijin's wish to expand its Australian interests underscores China's continuing hunger for commodities and PMs. The move to a new world reserve system including the RMB (Renminbi, also known as the Yuan) and backed by gold is now more likely. I have written about that here and you may read the OMFIF report here. Regarding the geo-strategic shift of wealth and power from West to East to create a more balanced world system, note that this report on a reserve currency basket including gold was commissioned by the World Gold Council, the Federal Reserve and Bank of England. Western powers are easing the flight of gold from West to East and encouraging the rise of Shanghai and Hong Kong as counter weights to New York and London in the emerging multi-polar world system.

The thirty days since the GS low-ball gold target and guidance to short sell have demonstrated that the Asian appetite for gold remains immense. The shift of wealth and commodities from West to East will greatly affect world commerce, governance, economies and markets in the coming age of austerity and demographic decline. For now, the pending Barrick-Zijin deal like Zijin's joint investment facility with Sprott and the multilateral backing for a new reserve system indicates that gold's current malaise masks a resurgent future role. This is a plus for Barrick and all significant producers of precious metals.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ABX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.