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Is Barrick Gold Corporation About to Seal a Golden Deal?

By Matthew DiLallo – Nov 28, 2016 at 12:00PM

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The world’s largest gold miner reportedly received an expectation-beating bid for its stake in an Australian joint venture.

Image source: Getty Images.

Barrick Gold (GOLD -0.11%) is on a quest to slim down and refocus its attention on growing shareholder value as opposed to just increasing gold output. To achieve that aim the company is selling non-core assets and using that cash to pay down its mountainous debt. It recently initiated a process to explore the sale of its 50% stake in Kalgoorlie Consolidated Gold Mines (KCGM), which is the largest open pit gold mine in Australia. Interest in the asset was reportedly pretty robust, and according to a recent Reuters report, Barrick received a very generous bid for that asset.

Digging into what's at stake

Barrick currently co-owns KCGM with Newmont Mining (NEM -0.70%), which is a partnership they have shared for more than a decade. The massive mine produces 700,000 ounces of gold each year, making it one of the largest open pit mining operations in the world. That said, despite its large size, cash costs are expected to range between $610 to $630 an ounce this year, which are well above those of Barrick's core mines, where cash costs are expected to average in a range of $480 to $510 an ounce. Because of those higher costs, and the fact that Barrick is a minority owner, it put the asset on the market to push it closer toward its target to reduce debt by at least $2 billion this year as it strives to become debt free within a decade.

Newmont had hoped to buy out its partner's stake in the mine because it would have tilted the balance of power in the gold sector from Barrick to Newmont, which would have then become the largest gold miner. This shift would not have been a problem with Barrick, which is no longer concerned with size -- only value. That is why the sticking point between the two came down to a disagreement on the mine's valuation, with Barrick wanting a value that was favorable for its shareholders while Newmont wanted to buy the stake at an excellent value. This disagreement on price opened the door for other bidders.

Image source: Getty Images. 

The winning bidder?

Because the door was wide open, the bidding drew companies from around the world. However, according to a report by Reuters, Australian mining company Minjar Gold is the leading bidder at $1.3 billion. That is well above the value analysts pegged on the asset, which saw it worth between $600 million to $1 billion. Barrick is currently studying the offer to ensure that Minjar, which is a subsidiary of a larger Shanghai-listed property development and management company, has the resources to complete the transaction.

If the deal does get done at that valuation, it would be a big win for Barrick Gold. That is because it would enable the company to accelerate its debt reduction efforts, putting it a step closer to its ultimate debt reduction goal.

That said, the deal is far from a sure thing. Aside from the concerns about the financial capabilities of Minjar, another issue that could derail the transaction is the recent slump in the price of gold since Barrick put the asset on the market. After peaking at more than $1,350 an ounce this summer, gold is down about 11% to around $1,200 an ounce. Because of that slump, it could not only be harder for Minjar and other buyers to obtain funding but also to justify a premium valuation for the asset.

Investor takeaway

Barrick Gold looks like it is getting close to sealing a deal to unload a non-core asset for a premium price. That would provide the company with more cash than anticipated, enabling it to take a big step forward in its debt reduction plan. That is, of course, assuming the deal goes through, which considering the leading bidder and the weakening gold market is no sure thing at the moment.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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