May 22 (Bloomberg News) -- Barrick Gold Corp. (ABX), the biggest miner of the metal by sales, is considering shrinking in size as the company focuses on returns over production volumes, Chief Executive Officer Jamie Sokalsky said.
“Being more profitable is better than being bigger,” Sokalsky said yesterday at the Bloomberg Canada Economic Summit in Toronto. “If we divested of some of those smaller, higher-cost assets and came down to a suite of assets that are long-lived and lower-cost and more valuable, I think that ultimately that can be a better investment proposition.”
Gold producers are trading at their cheapest in more than a decade relative to the broader market, according to data compiled by Bloomberg, as investors flee the industry amid rising mining costs, project delays and asset writedowns. Sokalsky, who took over as CEO of the Toronto-based company 11 months ago, is reviewing growth plans and pursuing asset sales as gold trades at a two-year low and is poised to end a rally that has extended for 12 straight years.
Barrick, the owner or part owner of 27 mines, rose 2.1 percent to C$20.29 at 9:43 a.m. in Toronto. The company closed at a two-decade low on April 17, losing its position as the top gold miner by market value to Vancouver-based Goldcorp Inc. (G) last month.
It makes sense for Barrick to shrink, said George Topping, an analyst at Stifel Nicolaus & Co. in Toronto. Selling the company’s Australian assets would be “a good place to start,” he said. Barrick is working with Bank of America Corp. and UBS AG on a possible sale of Australian mines, two people with knowledge of the matter said last month.
“At the 8 million-ounce level, with 26 or so mines it’s very difficult to focus,” Topping said yesterday by phone. “In order to have better managerial control you’re better off with fewer but much larger assets, preferably in the same north-south time zones.”
It’s easier to manage a company with fewer assets, said Sokalsky, 55. The location of mines also has taken on a greater importance because of an increase in so-called resource nationalism, in which governments seek a bigger slice of revenue. After a dispute with the Dominican Republic, Toronto-based Barrick on May 8 agreed to amend a lease governing the Pueblo Viejo mine in the country.
Investors including hedge-fund billionaire John Paulson have also pushed for some gold producers to consider separating assets that are located in riskier locations. Johannesburg-based Gold Fields Ltd. (GFI) in February spun off most of its assets in South Africa, which has been beset by labor disputes and seen a political debate about nationalizing mines.
“Five to 10 years ago a mine in Papua New Guinea might get the same valuation as a mine in Canada in the market place, and I think that’s changed considerably,” Sokalsky said. “Differentiating the portfolio from a geopolitical standpoint can also change the dynamic of how valuable your assets are.”
Barrick said in February it’s seeking buyers for its energy unit and a 50 percent stake in the Kabanga nickel project in Tanzania. It’s “actively” looking at selling other assets, Sokalsky said yesterday, declining to name them. Barrick won’t resort to a “fire sale,” he said.
Sokalsky said it’s harder to sell assets now than it would have been a couple of years ago because of lower metal prices and equity valuations. The general mood in the gold industry is “anti-M&A,” he said.
Mining companies led by BHP Billiton Ltd. (BHP), the world’s largest, are holding the biggest-ever sale of assets this year as producers seek to boost earnings and cut costs, with about $48 billion of mines and assets on the block.
Still, Sokalsky said he doesn’t believe the long-term bull market for gold has ended and expects the price will eventually rise to a record. Central bank purchases of gold, high government debt levels and a lack of new supply will support prices for the metal, he said. A rally back to $1,700 to $1,800 an ounce in the next 12 months is probably “achievable,” he said.
Sokalsky, who was previously Barrick’s chief financial officer, was promoted to CEO on June 6 to replace Aaron Regent, who was fired after the board said it was “disappointed” by the company’s share-price performance.
Despite Sokalsky’s efforts to cut operating costs, sell underperforming assets and resolve the problems dogging its $8.5 billion Pascua-Lama project in the Andes, Barrick’s shares have continued to slide, along with those of its peers. Barrick has fallen 42 percent this year while the Philadelphia Stock Exchange Gold and Silver Index has dropped 38 percent.
The 30 companies in the Philadelphia index trade at 1.04 times book value, compared with a 2.48 multiple for the Standard & Poor’s 500 Index. The average ratio for the Philadelphia index in the past 10 years is 2.45, according to data compiled by Bloomberg.
There’s an opportunity for gold equities to outperform the metal, after two years of trailing gold, Sokalsky said.
“Given the valuations where they are now and the fact that the gold price has come down but the share prices have come down even more, I do think that there is a good opportunity for some of that money to come back into the gold equities,” he said.
Barrick hopes to have more clarity within a few months on the future of Pascua-Lama, which lies on the Chile-Argentina border, Sokalsky said. The company said April 24 it was considering options including suspending the project after construction on the Chilean side was halted because a court accepted an injunction filed by indigenous communities concerned about water supplies.
Barrick raised the cost estimate for the project twice last year and said output would be delayed by more than a year, until the second half of 2014. The company, which has invested almost $5 billion in Pascua-Lama, made mistakes at the project, including how it managed environmental controls, Sokalsky said.
“It’s an important project for us, but we need the further clarity before we actually spend significant amounts more money,” he said.
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