Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

The world's two biggest gold miners, Newmont and Barrick, tend to be talked about in the same breath. They held merger talks in 1991 and 2000 and wooed each other for several years after 2009, culminating in formal takeover discussions that eventually broke down in 2014.

Tough times have a habit of highlighting the differences between companies, though, and Barrick's decision to sell half of their Australian joint venture shows why its shareholders, with their better-quality asset base, came out best from the collapse of those talks.

Sibling Rivalry
Barrick's market cap slipped briefly behind Newmont's last year, but is already recovering
Source: Bloomberg

Both Newmont and Barrick have 50 percent stakes in the Kalgoorlie Super Pit, a lode in the semi-desert of Western Australia that's been mined for more than 120 years. Barrick announced plans to sell its share in second-quarter results Wednesday and Newmont, which has already expressed an interest in the stake, can be considered the presumptive buyer.

Once one of the world's greatest gold mines, the Super Pit is starting to look a little long in the tooth. Both partners in the mine now have others which produce more gold, and at lower costs. Kalgoorlie's own reserves amount to 4.2 million ounces,  enough to keep the mine open for less than seven years at current annual output rates of 636,000 ounces.

24-Carat
The annual output of Barrick's major gold mines runs well ahead of most of Newmont's pits
Source: Company reports, Bloomberg
Note: Showing most recent fiscal-year figures. Not all companies have the same fiscal year-end.

A New Zealand prime minister once joked that people who migrated from his nation to Australia increased the IQ of both countries. There's something similar going on here: Selling off Barrick's stake in Kalgoorlie to Newmont will improve the resource endowment of both companies.

A comparison of the mine to the world's biggest gold pits illustrates why. Last year, the Barrick-operated Goldstrike, Cortez, Pueblo Viejo, and Veladero pits produced a combined 3.6 million ounces at lower all-in costs than Kalgoorlie's $965 an ounce. 

The Price of Gold
All-in sustaining cash costs of major gold mines
Source: Company reports, Bloomberg
Note: Polyus and Kinross gold don't consistently break out costs for individual mines, so figures shown are whole-of-company. All-in sustaining cash costs are a non-GAAP measure so may be accounted differently by different companies.

Once Newmont gets rid of its Batu Hijau copper-gold project in Indonesia, its only mines on the scale of Kalgoorlie that can produce cheaper gold will be Yanacocha and Boddington, with a combined 1.7 million ounces.

Newmont's recent share-price outperformance versus Barrick has come largely as a result of a period when investors became justifiably scared about miners carrying too much debt. Barrick's net debt of $6.6 billion at the end of June amounted to about 68 percent of its equity, compared to a much more healthy 18 percent ratio at Newmont.

When commodity prices slump and default risks rise, fretting about leverage makes sense. When conditions improve, though -- and spot gold is up 26 percent so far this year -- resource quality comes to the fore again. After putting through almost $11 billion of writedowns since gold prices peaked in the September quarter of 2011, Barrick now looks leaner than Newmont, with a stronger bank of mines that can churn out more gold at significantly lower costs.

Richly Valued
Price-to-book ratios of the duo
Source: Bloomberg

All-in expenses over the year through December will be in the range of $750 an ounce to $790 an ounce, Barrick said Wednesday -- well below the $870 an ounce to $930 an ounce Newmont is forecasting. Equity markets haven't been blind to this, and Barrick's price-book ratio has tripled over the past year, with its shares now worth more than three times their net asset base.

That sounds expensive for a miner as leveraged as Barrick, but when you're digging gold out of century-old deposits you can afford to think on a more geological scale. Thanks to asset sales and cashflows from mining low-cost deposits, Barrick's debt has been dropping sharply, falling by $4.5 billion over the past 12 months -- a 40 percent reduction.

The ebbing of those balance-sheet jitters brings the focus back where it should be, on the resource base -- and Barrick's is arguably the world's best. The quality of a miner's debts may wax and wane but the quality of its assets endures.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Based on proven and probable reserves.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net