2 Miner Developments in the Big Gold Sector

Late last week, I had a breathless call from an acquaintance in Toronto to discuss breaking news from Barrick Gold (ABX). Barrick announced a huge, $3 billion “bought deal” equity offering to strengthen its ailing balance sheet.

This bought-deal came right after Barrick announced that it’s suspending work on its very troubled Pascua-Lama project that straddles the border between Chile and Argentina.

Wow, two chunks of big-time mining news about “Big Gold” within minutes!

It’s time to drive home the point that the mining investment cycle has turned.

The Barrick bought-deal is based on a syndicate of underwriters led by RBC Capital Markets, Barclays and GMP Securities LP. It means that Barrick is issuing new shares for cash — equivalent to about 16% of current outstanding equity, at a fixed price of $18.35. That’s nearly 6% less than the previous day’s closing price, but it’s apparently the number that makes the deal.

Barrick certainly needs cash. Barrick announced that it will use about $2.6 billion of new funds to retire outstanding debt, of which the company carries over $15 billion on its burdened books.

Barrick’s debt load is WAY too much. The overall debt is a company-killer in the current “down” gold price environment, even including the fact that interest rates are at historical lows. Looking back, much of that debt is related to Barrick’s $7.68 billion takeover of copper-miner Equinox in 2011 — a monumental mistake, looking at it with the benefit of our impeccable, 20/20 hindsight.

In recent months, Barrick has sold assets and cut costs across the board. That’s the right thing to do under the circumstances. But the conventional ideas have not been enough to restore the company to financial health, let alone to impress the Wall Street analysts.

Now add news that Barrick is suspending work on Pascua-Lama. The business rationale is simple — to give Barrick financial breathing room. Suspending the gigantic money pit of a South American mine will avoid nearly $1 billion of capital spending in 2014.

On the downside, however, suspending Pascua-Lama will insert a large monkey wrench, so to speak, into the picture of Barrick’s future growth. Eventually, the mine was supposed to crank out 800,000 ounces per year of gold, as well as other metals. Not so fast, eh?

Barrick already slowed down construction at Pascua-Lama this year, after Chilean regulators ordered the company to halt work due to water and other environmental issues. The slowdown upended Barrick’s capital timetables because the ramp to production moved further into out-years, while employees and contractors are still being paid.

In the short term, recently, Barrick focused construction efforts on the Argentine side. But by just building “half” of a project, Barrick could not make up for lost efficiencies. You can’t build half a mine.

Meanwhile, the original $3 billion cost estimate for Pascua-Lama has long gone by the boards. Costs for Pascua-Lama exceed $5.8 billion to date, with perhaps $3 billion more destined to go into the ground if the project ever proceeds to completion. Even then, Pascua-Lama has been problematic. Barrick previously wrote down $5.1 billion on the site.

In the current climate for international resource investing, I’m OK to see Barrick suspend operations at Pascua-Lama. It sends a message to governments everywhere that foreign companies are not cash cows and patsies. To paraphrase President Obama on another subject, if you like your gold mine, you can keep your gold mine.

That is, there’s a troubling tendency amongst politicians and regulators across the world to think that resource companies are chickens to be plucked. Everywhere one looks, the shakedowns have been growing in size and scope, if not audacity.

Well, it’s time to drive home the point that the mining investment cycle has turned. The days of strong pricing are behind us — for a while, at least. On the demand side, the Chinese economy is slowing, and likely in more trouble than most outsiders (and many insiders) want to admit.

For miners, costs continue to rise. It’s everything, too: labor, energy, steel, concrete, machinery, equipment. And then pretty much every company encounters all manner of other players with their hands out, asking for payment on one thing or another… or another. It just doesn’t end.

Over time, I’ve been positive about Barrick, as well as negative. The company is where it is, and past management teams have done what they’ve done. Looking ahead, the bought-deal is dilutive to current shareholders. Yet the new cash will also go to retire high-end old debt. Meanwhile, the Pascua-Lama call is right, under the circumstances.

Let’s let the dust settle here. Don’t rush in just yet. But watch and wait, because Barrick’s current share price is low enough to be a tempting buy. Things are getting better, despite all the sound and fury. Indeed, Barrick recently announced quarterly earnings of $580 million, or 58 cents per share. That beat analyst expectations. And Barrick’s all-in cash cost of $916 per ounce of gold is the lowest among senior gold producers.

That’s all for now. Thanks for reading.

Byron W. King
for The Daily Reckoning

Ed. Note: Long story short… There’s still plenty of movement left in these markets. And that could mean tremendous profits for those who know how to play them. That’s where the Daily Resource Hunter comes in… Every morning, it gives readers a leg-up in the day’s resource markets with honest and insightful analysis from the industry’s leading experts. And it’s completely free to sign up. So don’t wait. Sign up for the Daily Resource Hunter, for free, right here and start learning specific ways to profit from the world’s most exciting resource stories.

Original article posted on Daily Resource Hunter

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Byron King

A Harvard-trained geologist and former aide to the United States Chief of Naval Operations, Byron King is our resident gold and mining expert, and we are proud to have him on board as the managing editor of Whiskey & Gunpowder.

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