Late last week, Rio Tinto (ASX: RIO) announced it was selling its 40% stake in the Cortez gold project in the U.S. state of Nevada to major gold producer Barrick Gold (NYSE: ABX) for US$1.7 billion. Barrick gets 4.6 million ounces of additional proved and probable reserves at Cortez, where it’s cash-cost of production is below $US300 per ounce.
Cortez produced 538,000 ounces of gold last year. Barrick said it expects some planned investment in the property will ramp that up to about 1 million ounces per year in two years. So why would Rio Tinto sell its stake in a gold mine when gold prices are rising?
Rio Tinto carried the Cortez property on its balance sheet at a value of just $155 million, according to Andrew Trounson in the Australian. Let’s see… a 40% stake in 538,000 ounces of annual production is about 215,200 ounces. Take a gold price of $940, subtract a production cost of $300/oz and you get $640 per ounce multiplied by 215k oz… and you get about $138 million… the market value of Rio Tinto’s share of Cortez’s current annual production.
Of course, if you factor in a rising gold price and increased production at Cortez, well than the market value of Rio Tinto’s stake is ever larger. Any way you look at it, though, at $1.7 billion, Barrick Gold paid a premium for Rio Tinto’s stake. Rio Tinto got a price much higher than the book value of the asset. So was it a good deal for Rio Tinto and its shareholders?