Barrick Gold Corp. (ABX) and its global competitors are poised to sell assets this year as the companies seek to reverse two years of share-price declines.
Barrick, the largest producer of the precious metal, held talks to sell its majority stake in African Barrick Gold Plc (ABG), which runs the company’s highest-cost mines, before announcing today the negotiations had ended. CEO Jamie Sokalsky is reviewing the company’s other assets, and Newmont Mining Corp. (NEM), the world’s second-biggest gold miner, and Canada’s Kinross Gold Corp. (K) are among other producers that may sell assets, according to Dahlman Rose & Co.
“Every single one of the companies in this industry is looking for ways to create value, whether it be a spin out, or being taken over, or a restructuring,” David Christensen, who oversees about $450 million as CEO of San Mateo, California-based ASA Ltd., said in a Dec. 11 phone interview.
The possibility of increased sales represents an about-face for an industry that spent $69.7 billion on 410 takeovers and joint ventures in the last five years, as companies competed to boost output and reserves. Now gold miners including Barrick say they’re focused on returns instead of growth after equities lagged behind gains by the metal for the sixth straight year.
Barrick has received approaches from companies interested in some of its assets and is continually reviewing its entire portfolio, Sokalsky said today in an interview.
“We are being approached by companies, other buyers,” he said. “If there are opportunities to divest assets that are worth more to someone else than us, we will absolutely take a look at that.”
“There are many people that see our assets as quite attractive,” Sokalsky said. Barrick doesn’t “have anything to talk about at the moment.”
Selling high-cost or lower-return assets is a way producers can show investors they’re serious about making better decisions, said Ari Levy, a money manager at TD Securities Inc. in Toronto.
“That’s one of the steps that the Street is going to be looking for to see that these companies really are invoking increased capital discipline,” Levy, who co-manages the TD Precious Metals Fund and the TD Resource Fund, said by phone Dec. 20. “The market is absolutely in a ‘show me’ phase.”
Barrick and Newmont may consider selling or spinning off Australian assets, where rising labor costs and a stronger local currency have pressured profit margins, said Adam Graf, a New York-based analyst at Dahlman Rose. It may also make sense for Greenwood Village, Colorado-based Newmont to sell its holdings in the Yanacocha mine and delayed Conga project in Peru and reinvest the money elsewhere, he said last week in a phone interview.
“All the major companies have older assets that have become high-cost, either because they are seeing grade declines or because they are sitting in countries where the currencies have appreciated,” Graf said. The other category for potential sales would be earlier-stage projects or mines that haven’t met companies’ expectations, he said.
Gold companies announced $1.73 billion of asset sales, joint ventures and spinoffs bigger than $100 million last year, 77 percent more than in 2011, according to data compiled by Bloomberg.
Among other potential deals, Newmont said Dec. 17 it’s in negotiations to sell its stalled Hope Bay project in northern Canada. Gold Fields Ltd. (GFI), based in Johannesburg, said in November it will spin off all except one of its South African assets after a wave of strikes and above-inflation pay increases.
Some of Gold Fields’ competitors may consider following suit this year, Christensen said.
“The South African companies remain the prime candidates for creating value in that respect,” he said. “The combination of their local and international asset base makes it an easy split.”
Some recent deals suggest that investors support asset sales. Barrick rose 8.9 percent in the week after it disclosed the African Barrick talks, while AuRico Gold Inc. (AUQ), a Toronto-based producer, soared 21 percent Oct. 10 after announcing a sale of Mexican assets to billionaire Carlos Slim’s Minera Frisco SAB. AuRico said Dec. 17 it used the proceeds to pay down debt and would buy back as much as $300 million of its own shares.
Kinross, Canada’s biggest gold miner after Barrick and Goldcorp Inc., was also among sellers last year. AngloGold Ashanti Ltd. paid the Toronto-based company $220 million in June for 50 percent of a Brazilian gold mine.
J. Paul Rollinson, who was promoted to replace Tye Burt as CEO of Kinross on Aug. 1, said later that month he was reviewing costs and that the new approach may lead to some “tough choices.” The sale of non-core assets is a possible source of capital, Kinross said in a Nov. 7 filing.
“The senior management of most of the industry has turned over in the course of the last 12 to 18 months,” Christensen said. “That in itself shows an impetus and a drive by the boards of directors saying that something needs to change.”
Barrick said June 6 it fired Aaron Regent as CEO after it was “disappointed” by its share price. Newmont last month named Gary Goldberg, the company’s chief operating officer, to replace CEO Richard O’Brien on March 1.
Barrick fell 24 percent last year in Toronto, its biggest drop since 1997, and 13 percent in 2011. Newmont declined 23 percent in 2012 in New York, its biggest decline since 2000, and 2.3 percent in 2011. Meanwhile, gold futures have increased for 12 straight years on the Comex in New York, including 7 percent last year and 10 percent in 2011.
Gold-mining equities have lagged behind gains in the metal as investors bought exchange-traded bullion funds for exposure to rising gold prices. Last year, the S&P/TSX Global Gold Index of 55 companies fell 16 percent.
At the same time, producers have disappointed investors with operational slip-ups, cost increases and project delays. Barrick raised the cost estimate for Pascua-Lama, its project on the Chile-Argentina border, twice last year, to as much as $8.5 billion, and said it now expects initial output at the mine in mid-2014 instead of mid-2013.
Spokesman for Barrick, Newmont and Kinross declined to comment on whether their companies are considering further asset sales.
Size and Scale
The advantages of size and scale in mining meant that consolidation has been a predominant theme in the industry over the past decade. Glencore International Plc’s $33 billion bid for Xstrata Plc was last year’s biggest takeover worldwide and would make the combined company the fourth-largest miner after BHP Billiton Ltd. (BHP), Rio Tinto Group and Vale SA.
The principle that bigger is better still applies for gold miners, said Sadiq Adatia, chief investment officer at Sun Life Global Investments in Toronto.
“You need to see more mergers, it’s an economy-of-scale game,” Adatia said in an interview on Dec. 20. Gold mines tend to be in riskier, less politically stable regions, where operators need to develop social goodwill and relationships with governments, he said.
“Smaller companies can’t do it, they don’t have the horsepower,” Adatia said.
Companies will have to take a closer look at all their assets, TD’s Levy said, and “try to figure out what realistic returns they can get from them.”
“You can’t love everything that you have,” Levy said.
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