Barrick (ABX), ATAC Join Forces To Explore Orion Project

Barrick Gold Corporation (NYSE:ABX) and ATAC Resources Ltd. have entered into a property earn-in agreement. The deal will allow Barrick to acquire up to 70% interest in the key areas of ATAC’s Rackla Gold Property, also known as the Orion Project.

The property earn-in agreement involves multiple transactions which will require Barrick to invest roughly $63.3 million. The total investment by Barrick includes a two-staged earn-in exploration option worth $55 million and private placement of roughly $8.3 million.

Per the terms of the agreement, Barrick is required to bear the exploration expenditures worth $35 million over the next five years to acquire a 60% interest in the Orion Project. This includes $10 million guaranteed exploration commitment during the first three years. Barrick will not acquire any interest in the project if it withdraws from exploration after incurring $10 million expenditure but prior to investing full amount of $35 million.

Barrick will have to incur additional $20 million expenditure toward exploration, allowing the company to increase aggregate interest to 70% in the Orion Project. The company can earn 70% interest in the project by incurring exploration expenditure of $55 million. However, Barrick will have to pay a guaranteed amount of minimum $10 million on or before Dec 31, 2019 and additional amount of minimum $10 million and $15 million in the subsequent two years.

Following the investment expenditure of $35 million by Barrick towards exploration, the company will form a 60:40 joint venture (JV) with ATAC. ATAC will have the right to purchase 10.1% interest from Barrick’s portion of JV, in case Barrick do not exercise the right to acquire additional 10% interest. This would reduce Barrick’s interest in joint venture to 50.1% and increase ATAC’s interest to 49.9%.

If the interest of either company is reduced to less than 10% in the Orion Project, that company’s interest will convert into a sliding-scale Net Smelter Return Royalty (NSR) on the basis of adjusted gold prices and cumulative gold production. The NSR will vary between 1% and 3% and there will be no provision for buyout.

Concurrent with completion of the earn-in agreement, there is a flow-through private placement under which Barrick will invest around $8.3 million in ATAC. The offering of flow-through common shares will be sold at 50 cents per share under donation arrangement structured by PearTree Securities Inc. This will increase Barrick’s shareholding in ATAC shares from 9.2% to 19.9%.

According to Rob Krcmarov, Barrick's Executive Vice President of Exploration and Growth, partnership with ATAC will allow both companies to leverage respective expertise in exploration of Canada's only Carlin-type system. Barrick’s experience and knowledge combined with ATAC’s generative exploration skills will unlock full potential of Rackla Gold Property, located in the east-central district of Yukon.

Barrick’s shares gained 16.8% in the last three months, outperforming the Zacks categorized Mining-Gold industry gain of 5.3%. Stock gained momentum partly on the back of cost and debt reduction initiatives taken by the company.

Barrick reported net profit of $425 million or 36 cents per share in the fourth quarter of 2016. In the year-ago quarter, the company incurred a net loss of $2.6 billion or $2.25 per share. Barring one-time expenses, the adjusted earnings of the company were 22 cents per share, which marginally beat the Zacks Consensus Estimate of 21 cents.

However, the prospects of a more hawkish stance from the U.S. Federal Reserve this year is likely to remain a major headwind for gold prices in the near term. President Donald Trump's proposed tax cuts, deregulation and fiscal stimulus are likely to spur economic activity and trigger a rise in inflation, which could prompt the central bank to increase rates further in 2017.

Barrick currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Better-ranked companies in the basic materials space include Univar Inc. (NYSE:UNVR) , United States Steel Corporation (NYSE:X) and BHP Billiton (LON:BLT) Limited (NYSE:BHP) . All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Univar has an expected long-term earnings growth of 9.4%.

United States Steel has an expected long-term earnings growth of 8%.

BHP Billiton has an expected long-term earnings growth of 5.6%.

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