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Barrick, Randgold Merging To Form Gold Industry 'Champion'

Metals & Mining

Global Mining Industry Outlook - What Are the Expectations?

Metals & Mining

2018 Mining Industry Outlook - What Are The Expectations?

Metals & Mining

Mining Perspectives Panel Discussion

Cost Competiveness Of European Mines

Metals & Mining
Barrick, Randgold Merging To Form Gold Industry 'Champion'


The New Barrick Gold Group would become, at least in the short term, the largest global gold producer by volume and by market capitalization.

The addition of Randgold's 1.2 million ounces of projected attributable production in 2018 to Barrick Gold's 4.8 Moz for the year pushes the combined entity's production above the 5.2 Moz projected for its closest peer Newmont Mining Corp.

Both companies bring to the merger what they consider "Tier one" mines, defined as having at least 500,000 oz/y of production, with total cash costs in the bottom half of the industry cost curve, over at least a 10-year mine life.

Oct. 10 2018 — Toronto-based Barrick Gold Corp.'s proposed merger with London-listed Randgold Resources Ltd. would create what the companies term "a new champion for long-term value creation in the gold industry," based on a large share of the world's "Tier One" producing mines, low total cash costs and strong management. Incidentally, the New Barrick Gold Group would become, at least in the short term, the largest global gold producer by volume and by market capitalization. The addition of Randgold's 1.2 million ounces of projected attributable production in 2018 to Barrick Gold's 4.8 Moz for the year pushes the combined entity's production above the 5.2 Moz projected for its closest peer Newmont Mining Corp.

Pending approval by both companies' shareholders, the deal is expected to close in the March 2019 quarter. The following analysis is based mostly on data compiled and analyzed separately for both companies as part of our Gold Reserves Replacement Strategies, 2008-2017 study.

When prices turned downward in 2012, Barrick acted

Once the world's largest gold producer in its own right, Barrick's attributable output of 5.3 Moz in 2017 was down 30% from 2008 and only just above that of Newmont. Output was expected to fall further in 2019, to 4.4 Moz, reflecting a strategic shift in the company's activities, away from a focus on production growth towards a prioritization of margin and an emphasis on balance sheet repair.

In 2013, in response to the declining gold price, Barrick wrote down US$13 billion of assets and placed 12 of its mines under review, which represented roughly 25% of the company's gold output at the time. Operations with all-in sustaining costs of more than US$1,000/oz — among them Bald Mountain, Round Mountain and Marigold in the United States and Plutonic in Western Australia — were put on the chopping block to improve free cash flow.

In 2015, Executive Chairman John Thornton articulated the company's strategy as one of focusing on gold, with no plans to diversify into other metals or to add to its existing copper position. Thornton outlined a plan to focus investment in the company's core regions to sustain high-quality, long-life assets in attractive jurisdictions.

Barrick's divestment and debt-reduction strategy is apparent in its M&A activity from 2015, when gold hit a six-year low annual average of US$1,160/oz, to year-end 2017, when it shed more than 14 Moz of gold in reserves through divestitures while halving its debt burden to US$6.4 billion.

Randgold did not engage in the same hunt for production growth that Barrick pursued in the late 2000s. While the company's gold output has been rising steadily over the past 10 years, tripling from 376,476 oz in 2008 to 1.1 Moz of attributable production in 2017, Randgold has consistently marketed its strategy as one of high hurdle rates, cautious reserve-price assumptions and a focus on margins. In terms of recent operating strategy, there is much that is complementary between the two companies in the proposed merger.

An enlarged portfolio of top-tier gold mines

Both companies bring to the merger what they consider "Tier one" mines, defined as having at least 500,000 oz/y of production, with total cash costs in the bottom half of the industry cost curve, over at least a 10-year mine life. Barrick has three: the Cortez and Goldstrike mines in the Barrick Nevada complex and Pueblo Viejo. Randgold has two: Loulo-Gounkoto and Kibali. The new management team is giving high priority to evaluating all assets with a focus on maximizing value on a relative few as quickly as possible and examining options for gaining value from others, including strategic partnerships and outright divestitures.

On an all-in sustaining cost basis, the five "Tier one" assets sit comfortably below or close to the median cost (US$983/oz), with a number of other producing assets also in the bottom half of the cost curve.

Concurrent with the Randgold merger announcement, Barrick reported a US$300 million mutual investment with Shandong Gold Mining Co. Ltd. The company said the investment is based on a two-pronged strategy: to have Shandong act as the vehicle for a Barrick push into China and to become a bigger partner in Latin America. Shandong's involvement could help pave the way forward for the stalled Pascua-Lama project in Argentina, looking at "an analysis of potential synergies between Lama and the nearby Veladero operation." On the company's first day of trade on the Hong Kong stock exchange, Shandong Chairman Li Guohong confirmed that negotiations centered on Pascua-Lama were under way. Barrick and Shandong formed a working group on the project when they struck a deal for nearby Veladero in 2017.

Trimming of the reserve base

Both companies currently have remaining reserves life of 11 years, based on their 2017 rate of production. Barrick's reserves base has been shrinking since 2013 — first because of a sharp cut in the reserves-calculation price in 2013, to US$1,100/oz from US$1,500/oz in 2012, and second because of the string of noncore asset divestitures averaging nearly 4 Moz of reserves annually over the past five years. Year-end reserves have fallen to 64.4 Moz of gold in 2017 from 138.5 Moz in 2008. Randgold, which has used a conservative US$1,000/oz or less in reserves calculations over the past 10 years, has been able to maintain year-end reserves between 16 Moz and 14 Moz since 2009.

Bringing more projects into production

While it holds a number of the world's largest undeveloped gold deposits, including Pascua-Lama, Alturas and Norte Abierto-Cerro Casale in Chile and Donlin in Alaska, Barrick's biggest challenge has perhaps been an inability to bring its own development projects to fruition. Randgold management's strong reputation for "developing and operating profitable gold mines in difficult environments" is seen as complementary to Barrick's "operational capabilities," according to Randgold CEO Mark Bristow, who has been named CEO of the New Barrick.

Barrick's pipeline consists mainly of expansion projects at existing mines, including Turquoise Ridge and Cortez Deep South in the USA and Lagunas Norte in Peru — all targeted to come online in 2021 or 2022. This reflects the company's conservative focus on brownfields investment. However, it has also invested in early stage exploration in the past 10 years and has shown considerable success in finding new orebodies, particularly in Latin America and Nevada. With total grassroots exploration budgets of US$804 million from 2003 to 2017, the company is credited with shares in 11 major gold discoveries, seven of which it still holds.

Although Randgold's development pipeline is currently modest, the company has successfully found and brought online four significant discoveries since the mid-1990s — all in West Africa, including Morila, Loulo and Gounkoto in Mali and Tongon in Cote d'Ivoire.

According to CEO Bristow, the company is aggressively hunting for its next big project in the African gold belts, as well as further afield, while also aiming to start developing three new projects over the next four years. Randgold's strategic threshold for all projects is a 20% internal rate of return at a US$1,000/oz gold price; new stand-alone deposits must, however, have a minimum size of 3 Moz of gold.

Randgold's flagship Loulo-Gounkoto gold mining complex in Mali, already one of the largest of its kind in the world, is still expanding, with the Gounkoto super pit and the new Baboto satellite pit joining its Yalea and Gara underground mines. Development of the Gounkoto super pit will extend the mine life by five years and make a significant contribution to the Loulo-Gounkoto complex's 10-year plan, which envisions production in excess of 600,000 oz/y at a gold price of US$1,000/oz.

In Senegal, the feasibility study for Randgold's Massawa gold project is nearing completion, with a development decision scheduled for the end of this year. According to Joel Holliday, Randgold's general manager of exploration, "continuing exploration is focused on expanding the Massawa reserve, and while it is still short of Randgold's 3 million ounce minimum requirement, the project's other metrics are positive."

Massawa was discovered by Randgold in 2007 and is one of the larger undeveloped gold deposits in West Africa. Its relatively long gestation period is a reflection of the company's tenacity and thorough approach to exploration, and a further example of its discipline in bringing projects to account.

Further refinement

The similarity in the two companies' currently projected production life suggests a merger that is focused primarily on maximizing the value of existing mines and projects, rather than on adding production. While the Randgold merger is at the forefront of Barrick's near-term plans, the company has clearly maintained its focus on core and 'strategic' assets, low production costs, preserving margins and value creation for shareholders. A forthcoming article will examine the potential scenarios for the evolution of the company's asset structure as this strategy takes hold.

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Webinar Replay: State Of The Market - Mining Q2-2018

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Watch: Global Mining Industry Outlook - What Are the Expectations?

Nov. 12 2018 — In less than 12 minutes, hear experts from S&P Global Ratings,

J.P. Morgan Asset Management, BMO and Altus Strategies discuss their views on the global mining industry outlook at the Mining Perspectives Panel Discussion 2018, held at London in October.

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Watch: 2018 Mining Industry Outlook - What Are The Expectations?


Mining Hot Spots, Growth, and Risk

Demand, Supply, and Mining Costs

Exploration Budgets and Trends

Investment Strategies

S&P Global Market Intelligence recently hosted a panel discussion in London to discuss the mining outlook for 2018. Our panelists include experts from S&P Global Ratings, Anglo American Plc, Bernstein Investment Research, and Management and Investec Asset Management. 

Watch the full video

Topics Covered:

  • Mining Hot Spots, Growth and Risk
    Where are the hot spots in 2018? Which countries are becoming riskier for mining? What will be the impact of politics on corporate strategies, growth, and risk?

  • Demand, Supply and Mining Costs
    How will changes in industrial production impact metals demand? What are the forecasts for new mined supply? What are the trends in mined ore grades and operating costs? Which major metal will have the greatest shortfall in supply?

  • Exploration Budgets and Trends
    What trends should we expect in 2018? Which metals and regions will have the highest budget expectations?

  • Investment Strategies
    Which investment strategies will make most sense? What is the consensus forecast for metals prices?

S&P Global Market Intelligence - Director of Metals & Mining Research

S&P Global Ratings - Simon Redmond, Director of Corporate Ratings
Anglo American Plc - Peter Schmitz, Head of Commodity Research
Bernstein Investment Research and Management - Paul Gait, Senior Research Analyst
Investec Asset Management - George Cheveley, Portfolio Manager

Watch: Mining Perspectives Panel Discussion

Cost Competiveness Of European Mines

Jan. 25 2017 — S&P Global Market Intelligence recently explored whether mines based in the European Union are cost competitive with other global producers. We examined operating costs of copper, iron ore, and gold mines in 2015. In considering unit costs for operating mines, figures indicate that the EU28’s mining operations are, and can continue to be, competitive compared to mines in other countries around the world.

The only consistently less competitive component of operating costs at EU28 mines is the labour cost. This is a result of high wage rates in the EU28 Member States compared to less developed countries. Labour costs within the EU28 do compare, often favourably, with those in other developed countries such as Australia, Canada, Chile, and the United States.

With the exception of copper in Poland, royalty and tax costs within the EU28 are generally more competitive than other countries. Other cost elements in EU28 mines are also generally similar to the average costs from other regions of the world. Mines operating within the EU28 benefit from being close to and having access to good infrastructure.

Copper: The EU28 account for 4.6% of global production in 2015, from mines in Bulgaria, Cyprus, Finland, Poland, Portugal, Romania, Spain, and Sweden. Of note is KGHM’s Polish operations, which accounted for nearly 50% of copper production from the EU28, and is one of the biggest copper mining complexes in the world. This complex is also the biggest silver producer in the world, mined as a by-product of copper production.

Figure 1 illustrates the operating costs for copper mines in the EU28 and other regions. In terms of costs per unit, Mexico is the most efficient producer, while Papua New Guinea (PNG) is the highest cost producer. The EU28 are located in the upper quartile of the chart and have costs similar to those of Brazil, Canada, and Zambia.

In terms of individual costs, the EU28 indicates higher ‘royalty and production taxes’ costs in comparison to countries with similar total mine costs (Canada, Brazil, and Zambia). EU28 labour costs are similar to those in Canada and Brazil, while its costs associated with ‘reagents’ are lower.

Figure 1 - Costs and production from primary copper mines in 2015

Iron ore: The EU28 account for 1.3% of global iron ore production, mined in three countries within the EU28: Austria, Germany, and Sweden. By far, the most significant contribution comes from Sweden’s LKAB operations, Kiruna and Malmberget, accounting for almost 90% of total EU28 iron ore production.

The EU28, on the right side of the horizontal axis, faces higher operating costs than Canada, but lower than that of the United States. In terms of individual cost components, ‘energy’ and ‘other onsite’ costs are higher in the EU28 than in Canada or the United States.

Figure 2 - Costs and production from iron ore pellet producing mines 2015

Gold: In 2015, The EU28 account for 0.9%  of global production, from operations in Bulgaria, Finland, Greece, Poland, Portugal, Romania, Spain, and Sweden, with over 80% coming from mines in Bulgaria, Finland, and Sweden.

Figure 3 illustrates the relative position of the EU28 gold producers on the global cost curve. The region is located on the extreme right of the horizontal axis, indicating its relatively high operating costs compared to all other countries reviewed.

TCRC & Shipment costs for gold mines within the EU28 are higher than all the other countries in this study as a result of a number of gold mines in the region producing a concentrate that requires smelting and refining, rather than dore.

Dore is a product comprising gold and silver almost entirely and is the most common product of gold mining operations. Refining dore to finished gold and silver incurs only a small refining charge and, because of its low bulk, transport costs are negligible. For these reasons most non-EU countries have very low TCRC & Shipment costs.

Instead of dore, several EU28 mines produce a concentrate. This concentrate typically has gold grades of hundreds of grams per tonne and requires both smelting and refining to produce finished metal. The additional smelting required compared to dore incurs a significant additional cost.

Greater transport costs are also incurred within the EU28 due to gold concentrate’s greater bulk compared to dore. This discrepancy in mass is due to gold concentrate’s comparatively low gold content. In addition, Chelopech gold mine in Bulgaria, which accounted for approximately one-third of the EU28’s gold production from primary gold mines in 2015, produces a concentrate with high arsenic content that incurs significant additional costs at the smelting stage. As a result, gold mines within the EU28 have high combined TCRC & Shipment costs. 

Figure 3 - Costs and production from primary gold mines 2015

Individual cost components

Labour: Labour costs from the EU28 mining operations are above average. Despite being above average, the EU28 labour costs are comparable to, and often lower than, developed nations such as Australia, Canada, Chile, and the United States. It is important to note that high salaries do not necessarily equate to high labour costs. 

A good example can be seen in iron ore (Figure 2), where the EU28, comprising LKAB’s Swedish mines Kiruna and Malmberget, has a lower labour cost than Australia, the United States, Canada and Chile. This is despite these mines being two of the only underground iron ore mines in the world, which are generally more labour intensive than open pit mines, and Sweden having relatively high wages. The reasonable labour costs here are a result of the mine’s efficient operation, which has been driven by LKAB over a number of years.

The converse of this can be seen in gold (Figure 3), where South Africa has the highest labour cost despite having relatively low wage rates. This is a result of many South African mines exploiting deep, difficult ore bodies using outdated techniques and equipment, which leads to low productivity rates.

Energy costs: In all commodities covered, the energy cost within the EU28 was generally close to the global average and sometimes lower. In general, consumption of both electricity and fuel is dictated by the equipment in use at each mine site rather than its geographical location. Mines operating within the EU28 generally benefit from having access to good infrastructure and therefore are usually able to source their electricity from national grids where electricity prices are reasonable. The countries with the lowest energy costs tend to be those with access to cheap electricity such as Russia, which has access to electricity generated using cheap natural gas, whilst the countries with the highest energy costs are those with poor infrastructure or remote mine sites where diesel generators are commonly used as a source of electricity.

Reagent costs: Reagent costs heavily depend on the type of ore being processed and the processing technique, as these factors dictate what chemicals are needed and how much is required. The price of chemicals does vary by region, but as this cost covers such a variety of products, no clear regional patterns can be distinguished. The reagent cost of mines operating within the EU28 will benefit from the good infrastructure in the region, as this will help reduce transport costs of any chemicals required whilst this same factor has an adverse effect on reagent costs in the countries with poor infrastructure or remote sites.

Other onsite costs: As these costs comprise a variety of components, it is difficult to draw any conclusions from regional figures. It should be noted that the EU28 mines covered in this study have approximately the same average onsite costs as other countries. There appears to be no benefit or detriment of these costs for mines operating within MS.

TCRC & shipment and offsite costs: These offsite costs for mines operating in the EU28 are close to the average cost for other countries covered for all commodities, with the exception of gold (Figure 3). Treatment and refining charges tend to be relatively consistent across the commodities, with facilities that undertake these processes charging the same price irrespective of the product’s origin. The presence of several integrated operations, were the mine is integrated with a smelter/refinery operated by the same company that operates the mine, within the EU28 appears to have had minimal impact, either positively or negatively, on these costs. The main variable is the cost of transporting the mine product to the treatment facility, with the mines in the EU28 benefiting from close proximity to multiple smelting/refining facilities. EU28 mines also benefit from access to good infrastructure, namely roads, rail, and ports. For this reason, countries with poor infrastructure or remote mine sites tend to have higher TCRC & Shipment and offsite costs, as transporting their products to the end customer or smelting/refining facilities is more expensive.

Royalty & production taxes: Costs from royalty and production taxes are below average for all commodities, with the exception of copper, due to state royalty systems that are favourable to mining in most of the EU28 Member States. In particular, Finland and Sweden have no royalties on commodities covered in this study, which leads to zero royalty and production tax costs for iron ore (Figure 2), as both operations covered here are in Sweden.

The relatively high royalty cost in copper (Figure 1) is a result of the mining tax introduced in Poland in 2012, which impacts the biggest copper producer in the EU28, KGHM’s Polish operations. Although this cost can be influenced by fees paid to private landowners or other companies, by far the biggest contributor to this cost is mining royalties and tax policies of individual countries.

As part of its STRADE [1] research project, S&P Global Market Intelligence’s Metals & Mining consulting team is investigating how to translate the EU28’s competitive advantages for mining operations into a strategy to promote mining investments into the region


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