Barrick Gold Corporation recently announced the sale of a 50% interest in Barrick (Niugini) Limited, the entity which holds a 95% stake in the Porgera gold mine, located in Papua New Guinea. The Porgera mine accounted for around 7% of the company’s consolidated gold shipments in 2014. The stake sale in BNL is the latest in a series of moves by the company, as it braces for a possible interest rate hike by the Fed and a period of extended weakness in gold prices.
Weak Gold Prices
Gold Prices in September, Source: Kitco
Gold prices currently stand at levels of $1,120 per ounce, around 11% lower year-over-year. Weakness in demand for gold has weighed heavily on prices. As per World Gold Council data, the demand for gold fell 12% year-over-year in Q2 2015, after a flat Q1. Both jewelry and investment demand for gold weakened considerably in Q2, which taken together account for over three-fourths of the total demand for the metal. The jewelry demand for gold fell 14% year-over-year in Q2, primarily due to weakening demand from China. A slowing Chinese economy and the recent turbulence in the Chinese stock markets has tempered consumer demand for gold in China. Investments into a rapidly rising Chinese stock market reduced discretionary spending on gold jewelry in the early part of Q2. Moreover, the sharp correction in the Chinese stock market in June wiped out capital gains made by investors, damaging consumer sentiment and reducing discretionary spending on precious metals. However, despite the recent volatility in the jewelry demand for gold, robust medium and long term trends in economic growth in China and India, the world’s largest gold consumers, should offer support to the jewelry demand for gold.
In addition to the weakness in the jewelry demand for gold, investment demand for gold declined nearly 11% year-over-year in Q2. Gold as an investment is primarily considered a safe haven asset, and is used as a hedge against inflation and economic weakness. The strengthening of the U.S. economy has reduced the investment demand for gold and led to a fall in prices of the metal. The Federal Reserve could start its interest rate tightening cycle with its meeting in the middle of this month. An increase in interest rates could further reduce the investment demand for gold as investors switch to interest bearing securities. A potential interest rate hike, whether in September or later in the year, will keep a lid on gold prices in the near term.
Weak gold prices have negatively impacted the profitability of Barrick’s operations in 2015. In addition, the high levels of debt on Barrick’s books in a weak gold pricing environment prompted Moody’s to downgrade Barrick’s credit rating to the lowest investment grade rating. A reduction of Barrick’s credit rating will raise borrowing costs for the company. To address the twin concerns of falling profitability and high debt, Barrick Gold has resorted to stake sales in high cost mines. Barrick Gold’s debt stood at $13.1 billion at the end of 2014. The company management set itself a $3 billion debt reduction target for 2015. With the completion of the stake sale in the Porgera mine, the company has nearly achieved its debt reduction target for the year.
With the persistent weakness in gold prices, gold miners are expected to face challenging business conditions for the rest of the year. However, steps targeting debt reduction, such as the stake sale in the Porgera mine, would help boost cash flows and ease the pain a little.
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