Barrick Gold (ABX:TSX)

Barrick Gold (ABX:TSX)

Gold Fields (GFI:US)

Gold Fields (GFI:US)

The garage sale is well underway over at Barrick (ABX:TSX).  The company has agreed to sell its Yilgarn South Assets in Australia to Gold Fields (GFI:US) for a $300 million.  The Yilgarn assets are comprised of three mines; the Granny Smith, Lawlers and Darlot mines which produced an aggregate of 452,000 ounces of gold at all-in sustaining cost of $1,137 per ounce of gold.  The mines have 2P reserves of 2.6 million ounces of gold, 600,000 ounces of gold in the measured and indicated categories and another 1.2 million ounces of gold in Inferred.  The valuation appears to be low, and it is, however Barrick is in desperate need of the cash and to divest some of its assets. This $300 million deal equates to a $115 per gold ounce of 2P reserves versus the peer group current valuation of $280 per ounce of 2P reserves.

But on a more general note, companies in the gold sector (and other metals) are not seeing the same takeover multiples they once did.  An example of this would be NewGold’s (NGD:TSX) recent acquisition of Rainy River (RR:TSX) in which they paid $310 million for over a 4 million ounce gold reserve.  This equates to $77 per reserve ounce of gold in the ground.  Compare this to Goldcorp’s purchase of the 2.5 million ounce Cerro Negro project from Andean Resources which they paid $3.4 billion equating to $1,360 per reserve ounce of gold.

Although each transaction is unique and demands a different valuation metrics (the quality of the ounces, political risks, technical risks, etc.), the trend of these takeover multiples appears to follow the general mining markets downward.  The result is similar to the housing markets where each home sold at a discounted price per square foot effects the next transaction price paid per square foot in the neighborhood which in turn affects the next.  What you’re left with is consistently declining valuations and this is what is occurring in the mining markets, specifically precious metals.

News Release here: Barrick Reaches Agreement to Divest Three Australian Mines