Because they deal in a commodity, gold mining companies are constantly trying to minimize costs in order to maximize profits. One of the ways in which they accomplish this is by optimizing their portfolios, acquiring and divesting assets as they see fit -- something that several industry leaders have recently demonstrated.
In late March, Goldcorp (GG) acquired interests in two gold projects located in Chile: a 25% interest in Cerro Casale from Kinross Gold (KGC -1.26%) and a 100% interest in Caspiche from Exeter Resource Corp. Following these acquisitions, Goldcorp then entered into a joint venture with Barrick Gold (GOLD) to consolidate the two projects. Let's dig into the details to see what these deals mean for these two companies and their investors.
What's the big deal?
Expected to close in the second quarter of 2017, the joint venture between Goldcorp and Barrick Gold will only come to fruition after several other transactions have been completed. In dealing with Kinross, Goldcorp will not only be acquiring a 25% interest in Cerro Casale for an initial $260 million in cash but a 100% interest in the nearby Quebrada Seca exploration project. Among other things, Goldcorp will also be granting Kinross a 1.25% royalty on 25% of gross revenue from the two projects.
Turning its attention to Barrick, Goldcorp will acquire a further 25% interest in Cerro Casale (bringing its total interest to 50%) for a deferred payment obligation of $260 million. Additionally, Goldcorp will grant a 1.25% royalty on 25% of gross revenue from Cerro Casale and Quebrada Seca. Among other things, Goldcorp will transfer a 50% interest in Quebrada Seca to Barrick for no additional consideration.
From Exeter, Goldcorp will acquire 100% of the Caspiche project, located about six miles from Cerro Casale, for total consideration of approximately $185 million. Once the acquisition is completed, Goldcorp will provide Caspiche to the joint venture with Barrick.
Unearthing more about the projects
Consolidating findings from mineral reports conducted by Kinross and Barrick, Goldcorp finds that Cerro Casale holds approximately 23 million ounces of gold in proven and probable reserves. But wait, there's more. The site is also a significant source of proven and probable silver and copper reserves of 58.7 million ounces and 5.8 billion pounds, respectively. What would development of the Cerro Casale mine mean? Kinross, which conducted a feasibility study in 2010, found that after an initial capital cost of about $4.2 billion, Cerro Casale would have a 20-year mine life.
Proven and probable gold reserves haven't been identified at Caspiche, but Goldcorp reports the deposit has measured and indicated gold reserves of 23 million ounces.
Based on a preliminary economic assessment conducted by Exeter in 2014, one option for the development of Caspiche would result in a mine with a 10-year life and an initial capital cost of about $251 million. Furthermore, under this scenario, the mine would have all-in sustaining costs (AISC) of $676 per gold ounce. This would be quite advantageous to Goldcorp, which estimates AISC to total approximately $850 per gold ounce in fiscal 2017.
Although both Cerro Casale and Caspiche have lower grades -- 0.60 g/t and 0.51 g/t, respectively -- and don't seem to be likely candidates for low-cost operations, Goldcorp seems optimistic that it can keep expenses in check. In the company's press release, David Garofalo, Goldcorp's president and CEO, stated, "The joint venture with Barrick has the potential to allow us to consolidate infrastructure to reduce capital and operating costs, reduce the environmental footprint and provide increased returns compared to two stand-alone projects."
Worth its weight in gold?
Located in the Atacama region of northern Chile, the Cerro Casale and Caspiche projects are both part of the Maricunga Gold Belt. Goldcorp, according to its press release, hopes to "leverage potential synergies" in the region -- a region that was the focus of a similar transaction last year: a 50-50 joint venture with Teck Resources (TECK -2.21%) to pursue development of the NuevaUnion project.
After recently revealing a five-year strategy of increasing gold production and reserves by 20% each while reducing AISC, Goldcorp is committed to increasing its net asset value per share. In another demonstration of this commitment, Goldcorp recently closed on the sale of its Los Filos gold mine in Mexico for $250 million in cash, which will help the company in its acquisition of Cerro Casale and Caspiche. Between the size of these gold deposits and the possible synergies to be recognized with the NuevaUnion project, Goldcorp has the potential to make considerable progress in executing its five-year strategy.
Cerro Casale isn't Barrick's only project in Chile; the company maintains a presence with its Pascua-Lama project. However, it has been inactive since 2013. Consequently, since neither company has a record of operating in the country, it's unclear whether Chile will prove to be one in which these gold mining companies can develop and sustain cost-effective operations.
With these projects still in the study phase, it will be some time -- probably several years -- before we are able to ascertain if the deals were worth it. In the meantime, Goldcorp and Barrick, two of the largest gold mining companies by market capitalization, have plenty of other projects where they're digging the yellow stuff out of the ground, and the long-term horizon for Cerro Casale and Caspiche will likely not affect the companies adversely. And patient investors of these two industry stalwarts may very well be rewarded should these gold deals pan out.