Barrick Gold announced the completion of a 25% stake sale in the Cerro Casale gold mining project to Goldcorp earlier this month, with the two companies (now both holding a 50% stake) looking to jointly develop the Chilean gold mine. The stake sale in the undeveloped mine, which would lower Barrick’s capital expenditure commitment towards the development of the project, is in keeping with the company’s strategy of disciplined capital allocation as it seeks to maximize cash flow generation, with the upside for gold prices remaining limited in the near term.
Lower Capital Expenditure Commitment
Barrick’s stake sale should enable the company to lower its capital expenditure commitments for Cerro Casale by $260 million. As a result of steady economic and jobs growth in the U.S., the investment demand for gold as a safe-haven asset is likely to remain subdued. In order to ensure price stability amid the improving economic conditions, the Federal Reserve is likely to raise benchmark interest rates by a cumulative 75 basis points in 2017, before potentially raising rates further in 2018. Thus, the investment demand for gold is likely to remain soft in the near term, and as a result we expect weak growth in gold prices, as illustrated by the chart shown below.
Besides lowering its capital expenditure commitment, bringing on board a partner with an equal stake in the development of the Cerro Casale project could also help Barrick spread the risk of adverse legal developments scuppering the Chilean gold mining project. Barrick Gold’s Pasuca-Lama project, located on the Chile-Argentina border, has been held up for a number of years amid legal challenges over alleged environmental issues. Accordingly, limiting its exposure to other potential issues is an additional advantage of the company’s stake sale in the Cerro Casale project. Thus, the recently concluded stake sale, in keeping with Barrick’s strategy of disciplined capital allocation, could also help lower the risk in the company’s mining portfolio.
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