China strikes gold in rare M&A deal

Shandong Gold’s acquisition of a 50% stake in Barrick marks one of the largest gold purchases by a Chinese buyer – an interesting change from copper and coal deals.

In purchasing half of Barrick Gold’s Veladero mine for $960 million, Shandong Gold took advantage of a rare chance to buy a world-class sizeable mine.

But this is just the start of their relationship: the new partners will go on to explore the Pascua-Lama deposit and then other mines in the El Indio Gold Belt on the border of Argentina and Chile, including the Alturas project.

Despite coming from the world’s largest consumer of the yellow metal, Chinese miners are dwarfed in an industry dominated by the Canadians.

Gold mines tend to be smaller than coal and copper mines, where China has made its mark around the world, and opportunities scarcer.

Based in Jinan, Shandong province, Shandong Gold, produced about 1.2 million ounces of gold in 2016. 

In comparision the Veladero mine, found in San Juan province, Argentina, had proven and probable gold reserves of 6.7 million ounces, and measured and indicated gold resources of 3.3 million ounces as of December 31. Analysts estimated the life of Veladero’s mine at eight to  years.

All that glitters
The mine is not running entirely smoothly. On March 28, a pipe carrying gold-bearing solution ruptured and the government of San Juan province, Argentina, temporarily restricted the addition of cyanide to the Veladero mine’s heap leach facility.

The incident could hit output during the first-half of the year as well as the cost and Ebitda of the mine.

Veladero is expected to produce between 770,000 and 830,000 ounces of gold in 2017, at a cost-of-sales of $750 to $800 per ounce, and all-in sustaining costs of $840 to $940 per ounce.

The spill followed similar disruptions in September 2016 and September 2015, when operations at Veladero were temporarily suspended by the authorities due to leaks of gold-bearing cyanide solution. 

While Pascua-Lama is another sizable deposit it has also encountered problems. The development of the project was suspended in 2013 due to prohibitive economics and difficulties encountered in cross-border underground mining development.

Shandong Gold can bring expertise as it is mainly an underground gold extractor. The miner will embed a team of underground mining engineers and project development specialists with Barrick’s PascuaLama project team.

However, both companies intend to maintain the Veladero mine’s current management team.

The mine will continue to be run by Barrick, but will be managed by a board with equal representation from both sides.

Shine come off
Some miners’ aggressive growth sputtered to a halt after gold peaked in 2011, forcing asset sales and cost cutting. This has provided an opening for ambitious Chinese buyers.

Shandong Gold could even buy more assets from Barrick as the Canadian miner continues to strive to reduce its debt to $5.0 billion by the end of 2018 from $7.9 billion at the end of 2016

“We see Helmo, 50% in Kalgoorlie, 47.5% in Porgera and 75% in Turquoise Ridge as potential divestments,” said equity analyst Yuriy Vlasov at Berenberg, Gossler & Co in a note to clients.

Eldorado Gold has been selling assets in China to focus on long-life low-cost mines. Last year it sold assets to Yintai Resources for $600 million. The Canadian miner also sold an 82% stake in its Jinfeng mine to China National Gold for $300 million.

Analysts expected Barrick, one of the world’s top five gold producers, to make asset sales after management gave a goal of decreasing total debt by $2.9 billion to $5 billion by the end of 2018.

Barrick's executive chairman, John Thornton, first met Shandong chairman Chen Yumin in April last year and they began to talk about a joint venture.

China is the world’s biggest market for gold. In little more than a decade, China’s bar and coin market has become one of the world’s largest, according to the World Gold Council. The combined share of world gold demand for India and China grew from 25% in the early 1990s to more than 50% by 2016.

The transaction is expected to close at the end of the second quarter of 2017.

The deal has received approvals from China’s National Development and Reform Commission, and the State-owned Assets Supervision and Administration Commission of Shandong Province.

However it still needs approval by the Ministry of Commerce and the State Administration of
Foreign Exchange.

Shandong has financing commitments in place for the full value of the transaction. Chinese banks have lined up to lend money to help it buy the stake in the mine.

CIBC World Markets is acting as financial advisor to Barrick. Davies Ward Phillips & Vineberg LLP is acting as legal counsel to Barrick.

Citigroup advised Shandong.


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