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Newmont Determined to Acquire Barrick's Stake in the Super Pit

GuruFocus.com

- By Alberto Abaterusso

The Denver Gold Forum in Colorado Springs from Sept. 18 to Sept. 21 was an opportunity to ask Gary Goldberg, CEO of Newmont (NEM), about the status of two transactions. One transaction should see Newmont becoming the sole owner of Kalgoorlie mine in Australia by acquiring the other 50% from Barrick Gold Corporation (ABX). The second one should see Newmont completing the sale of its 48.5% economic interest in its Indonesia operations, Batu Hijau, to PT Amman Mineral International for up to $1.3 billion.


Kalgoorlie stimulates the interest of several gold mining companies, but Newmont seems to be the most determined bidder in the sale process.

"We understand the asset well. We certainly are in a good position to be able to determine what at least we believe it is worth," Goldberg said.

If Newmont is determined to take over the half owned by Barrick Gold Corporation, a statement made on July 26 helped us understand that the apple is ripe and about to fall. Analysts have estimated that the half owned by Barrick is worth approximately $1 billion.

"The Super Pit" is managed by Kalgoorlie Consolidated Gold Mines (KCGM), Australia's second largest gold producer in 2012, on behalf of Newmont and its joint venture partner Barrick Gold Australia.

The mine is located in Kalgoorlie-Boulder, approximately 341 miles east of Perth, Western Australia, and produces about 316,000 attributable ounces per year. Since 1989, the date of the first production, Kalgoorlie produced more than 50 million ounces of gold.

Source: from Wikimedia Commons, the free media repository

At Kalgoorlie, Newmont's share of attributable gold production was 316,000 ounces of gold in 2015, at a cost applicable to sales of $853 and at AISC of $965 per ounce. At Dec. 31, 2015, Newmont reported 4.2 million attributable ounces of gold reserves.

Concerning the sale of the Batu Hijau mine in Indonesia, the closing is taking longer than expected but should fall in the beginning of the fourth quarter of 2016:

"It could be into the early part of the fourth quarter. It is just complex going through all the different elements of approvals," Goldberg said.

With the completion of the two deals, Newmont gives continuity to its trajectory of building a longer-life, lower-cost asset portfolio. Newmont's operating efficiency will increase and reflected in the improvement of one ratio in particular: the TTM average FCF per share of Newmont is already the highest in the gold stock industry, $1.89 versus 91 cents compared to competitors.

With a stronger asset portfolio, Newmont will take the best from a background of rising gold prices as the Fed decided to keep interest rates unchanged and therefore, it will be able to increase the free cash flow and dividend more going forward as well.

Meanwhile, the miner reaffirmed its 0.025 cents per share quarterly dividend for the second quarter of 2016.

Barrick's side: with the sale of its 50% stake in Kalgoorlie, Barrick can go on with its own strategy to reduce the debt in 2016. The target of Barrick is to cut the debt by another $2 billion. The sale of Barrick's 50% non-operating interest in Australia's Kalgoorlie mine and 64% stake in Acacia Mining (ACA.L) should provide the miner with the proceeds to lower the net debt to approximately $4 billion. As of the second quarter 2016, the total long-term debt amounted to $8.8 billion, of which $5 billion does not mature before 2033.

But this is not all. The divestment of the two non-core assets will also reduce costs since the unit in Africa and the mine in Australia contribute to the overall production of gold at an AISC that is approximately 25% and 15% higher than the average item.

Strengthening the balance sheet is a strategy that Barrick has successfully pursued since 2015, when the miner was able to generate about $2.8 billion with the sale of Bald Mountain and 50% of Round Mountain, with inflows from operations.

With regard to the criticism on what Barrick reported about the suspension of operations at Veladero in Argentina on Sept. 15, it is true that there is no mention of the word "cyanide" in the NR. However, it must be pointed out that it wouldn't have been necessary to do so, because those with expertise in mining activities know very well that the heap leach involves the use of cyanide over the heap to dissolve the metals that are collected at the bottom of the pad.

Here is a definition of heap leaching:


"Heap leaching is the process to extract precious metals like gold, silver, copper and uranium from their ore by placing them on a pad (a base) in a heap and sprinkling a leaching solvent, such as cyanide or acids, over the heap. This process dissolves the metals, and they collect at the bottom of the pad. The metal is then further processed. This methodology is mostly used for low-grade ores and the basic processing steps involve crushing and sometime grinding." - Technomine.com



Investors are rightly concerned about the decrease in the production that Barrick might suffer if operations at Veladero do not return to normal as soon as possible. Investors should remember what happened at the same mine last September; the decrease in production due to a temporary suspension of operations for a cyanide leak at Veladero was offset by an increase in production at Goldstrike, Cortez and Turquoise Ridge.

In 2015, the overall gold production was 2% lower than the prior year, but it was primarily due to the impact of the divestitures that occurred in the second half of 2015. The divested sites contributed an additional 135 thousand production ounces in 2014 compared to 2015.

Source: Barrick's financial report of FY 2015

Barrick has an asset base that allows it to reach gold production expectations anyway. There is a reason why this Canadian miner is called the World's Premier Gold Asset.

Disclosure: I have no positions either in Newmont or in Barrick.

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