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Barrick Gold has announced plans to sell its New South Wales-based Cowal gold mine to Evolution Mining for US$550 million. The deal has been praised by market watchers and appears beneficial for both parties. For Barrick, the sale is positive in part because it fits with its current goals of lowering its debt and reducing its presence in Australia.
On Sunday, Barrick Gold (TSX:ABX,NYSE:ABX) announced plans to sell its New South Wales-based Cowal gold mine to Evolution Mining (OTCMKTS:CAHPF) for US$550 million. The deal has been praised by market watchers and appears beneficial for both parties.
The sale is mainly garnering support because it fits with Barrick’s current goals of lowering its debt and reducing its presence in Australia. The company’s release states that proceeds from the sale “will be used to pay down debt” and “will also contribute to reduced general and administrative costs” as it finishes closing its office in Perth.
Expanding, Kelvin Dushnisky, co-president of Barrick, said, “[t]he sale of Cowal is consistent with the strategy we have outlined to create long-term value for our owners, making a significant contribution to our debt reduction target while further focusing the geographic footprint of our portfolio.”
As mentioned, market watchers agree that the sale is a good one for Barrick. Raymond James analyst Phil Russo told the Financial Post that Cowal is being sold at a 37-percent premium to the carrying value he’s placed on the asset. Furthermore, Barrick plans to reduce its debt by $3 billion in 2015, and he sees the $550 million from the Cowal sale making a good dent in that amount.
Similarly, the Financial Post quotes Josh Wolfson of Dundee Capital Markets as saying that the deal is “priced slightly higher than comparable transactions.”
A “transformational acquisition”
Given those comments about the high price paid for Cowal, investors might well wonder if Evolution is also getting a good deal. However, it seems like the answer to that question is a resounding “yes.”
Indeed, Reuters notes that once the deal goes through Evolution will be Australia’s second-largest gold producer, behind only Newcrest Mining (ASX:NCM) — not too shabby for a company formed just a few years ago. Specifically, the acquisition of Cowal will boost the company’s annual gold production to about 800,000 ounces a year, and will add to its existing portfolio of five gold and silver mines.
Commenting positively on the deal, Evolution’s executive chairman, Jake Klein, said, “[t]his is a truly transformational acquisition for Evolution. This is the high quality asset we have been looking for to cornerstone our business.” He also emphasized that his company believes it paid a fair price for Cowal, stating, “[w]e put in what we thought was a fair price, but one which we are very happy acquiring it at.”
In terms of how the company will pay Barrick, The Australian Financial Review states that Evolution will increase the amount of debt it holds and “conduct an underwritten $248 million raising.” While more debt might sound unappealing, Klein told the news outlet, “we don’t expect [Cowal] to be a capital-intensive mine; we expect it to be very cash-generative, and the cash flow from the portfolio means that our debt levels will go down rapidly.”
What’s next?
While the Cowal deal is exciting, both Barrick and Evolution have other projects in the works that may bear fruit in the near future.
For example, according to The Wall Street Journal, Evolution is in the process of acquiring the Australian mines belonging to La Mancha Group International. Market watchers will also be waiting to see how Evolution ends up stacking up against Northern Star Resources (ASX:NST), which according to Reuters bought four gold mines from Barrick and Newmont Mining (NYSE:NEM) last year.
“The jury’s out. Evolution’s definitely got scale but a little bit more operational risk and a little bit more debt,” Matthew Trivett of Patersons Securities told the news outlet.
Meanwhile, Barrick is still looking to sell its 95-percent stake in the Porgera gold mine in Papua New Guinea, which it put up for sale at the same time as Cowal. When the sale of Cowal goes through, the company’s only asset in Australia will be a 50-percent interest in the Kalgoorlie super pit.
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
