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Barrick (ABX), Shandong Ink Deal to Tap Mineral Resources

Zacks Equity Research

Barrick Gold Corporation ABX and Shandong Gold Group Co., Ltd. have entered into a strategic cooperation agreement. The deal will not only strengthen Barrick’s relationship with China but will also help it to tap available mineral resources over the long term.

Per the terms of the agreement, the listed arm of Shandong, Shandong Gold Mining Co., Ltd., will initially acquire 50% interest of Barrick's Veladero mine for a consideration of $960 million. Following which, Barrick and Shandong will jointly explore the Pascua-Lama mineral deposits. Both the companies will evaluate further investment opportunities in the El Indio Gold Belt, located on the border of Chile and Argentina, bearing world class gold mines and projects including Pascua-Lama, Veladero and Alturas.

Both the companies will share knowledge and resources to achieve operational efficiency, safety and environmental stewardship with continued focus on underground mining. Barrick’s operating experience in the region will be complemented by Shandong’s access to substantial mining, construction and engineering expertise.

Post the completion of the deal, the Veladero mine will be managed by the Joint Venture Board, comprising of three nominees appointed by each company. Chief Innovation Officer, Michelle Ash, will lead Barrick’s team while Shandong's team will be led by Deputy General Manager for Technology, Cui Lun.

The transaction is expected to close at the end of second-quarter of 2017, subject to regulatory and other approvals. It received approval from the shareholders of Shandong Gold Group, SASAC (State-owned Assets Supervision and Administration Commission) and the NDRC (National Development and Reform Commission).

However, application for approval is still pending from the shareholders of Shandong Gold Mining Co., Ltd. and other Chinese regulatory authorities including SAFE (State Administration of Foreign Exchange) and MOFCOM (Ministry of Commerce).

The strategic cooperation agreement will help Barrick to create long-term value for shareholders, government and the community. It will also help the company to pare existing debt and improve free cash flow per share.

The Veladero mine, located on the San Juan Province of Argentina, contains gold reserves of around 6.7 million ounces. Barrick estimates Veladero to produce 770,000 to 830,000 ounces of gold in 2017. It expects the cost of sales to be about $750 to $800 per ounce and AISC (all-in sustaining cost) of $840 to $940 per ounce.

Barrick reported net profit of $425 million or 36 cents per share in the fourth quarter of 2016. In the year-ago quarter, the company incurred a net loss of $2.6 billion or $2.25 per share. Barring one-time expenses, the adjusted earnings of the company were 22 cents per share, which marginally beat the Zacks Consensus Estimate of 21 cents.

Barrick’s shares gained 13.6% in the last three months, outperforming the Zacks categorized Mining-Gold industry gain of 5.4%. Stock gained momentum partly on the back of cost and debt reduction actions taken by the company.  


However, the prospects of a more hawkish stance from the U.S. Federal Reserve this year is likely to remain a major headwind for gold in the near term. President Donald Trump's proposed tax cuts, deregulation and fiscal stimulus are likely to spur economic activity and trigger a rise in inflation, which could prompt the central bank to increase rates further in 2017.

Barrick Gold Corporation Price and Consensus



Barrick Gold Corporation Price and Consensus | Barrick Gold Corporation Quote

Barrick currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Better-ranked companies in the basic materials space include Lundin Mining Corp. LUNMF, Ternium S.A. TX and Versum Materials Inc. VSM. All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Lundin has an expected long-term earnings growth of 34.1%.

Ternium has an expected long-term earnings growth of 18.4%.

Versum has an expected long-term earnings growth of 8%.

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