Barrick Gold Corporation (USA) (ABX), Canadian Natural Resource Ltd (USA) (CNQ): How Will This Asset Sale Affect the Industry?

Over the past 12 months, the gold mining sector has seen a tremendous amount of turmoil. Collapsing gold prices have caused many marginal producers to slash their profit forecasts or predict outsized losses for the 2013 and 2014 fiscal years. Even nominally healthy firms have been forced to lay off staff or close unprofitable facilities. Expansion plans and exploration projects have been taken off the table en masse. Very few producers have been spared.

In this tense, uncertain environment, it makes sense for companies like Barrick Gold Corporation (USA) (NYSE:ABX) to part ways with unprofitable or non-core divisions. The latest round of fat-cutting came with Barrick Gold Corporation (USA) (NYSE:ABX)’s announcement that it would sell its Barrick Energy subsidiary to Calgary-based energy firm Canadian Natural Resource Ltd (USA) (NYSE:CNQ) for about $173 million. This transaction comes on top of several additional asset sales that will provide Barrick Gold Corporation (USA) (NYSE:ABX) with about $475 million in revenue. Although this is not an ideal situation for the mining giant, investors should be heartened by its aggressive response to current market conditions.

Canadian Natural Resources Limited, Barrick Gold Corporation and Newmont Mining Corp (NYSE:NEM)

Barrick Gold Corporation (USA) (NYSE:ABX) competes directly with a number of mining companies that focus on precious and semi-precious metals. Many of these firms are based in Canada, including the massive firm to which it is selling its energy assets. Some others are not. Greenwood Village, Colorado-based Newmont Mining Corp (NYSE:NEM) falls into the latter category. Regardless of their respective home bases, these firms have plenty of similarities.

Both Barrick Gold Corporation (USA) (NYSE:ABX) and Newmont are low-cost gold producers that have mines in Canada, US, and other areas around the world. Newmont Mining Corp (NYSE:NEM) purchased Canada’s Fronteer Gold Inc in 2011 and became the second largest gold producer in the world.

Canadian Natural Resource Ltd (USA) (NYSE:CNQ), on the other hand, focuses on oil and gas exploration and production. It has grown to produce over 565,000 barrels of oil per day from 1,400 barrels about 20 years ago. Growth through exploration and acquisition has been key for the company. Now it is set to grow even more with Barrick Gold Corporation (USA) (NYSE:ABX)’s assets.

Until recently, all three were roughly the same size. After the recent drop in gold prices, Barrick and Newmont find themselves with rather depressed market valuations of $17.2 billion and $15 billion. By comparison, Canadian Natural Resource Ltd (USA) (NYSE:CNQ) has a full-strength market cap of nearly $34 billion. Strangely, Newmont still appears to be overvalued relative to its peers in the gold-mining sector. Its price-to-book ratio of 1.33 is roughly equivalent to that of Canadian Natural Resource Ltd (USA) (NYSE:CNQ) and comes in at nearly double that of Barrick.

In light of its lackluster earnings, this should be worrying for Newmont’s investors. In 2012, the firm posted a whole-year loss of $733 million on revenues of $9.1 billion. Meanwhile, Barrick lost $857 million on $14.3 billion in revenues. Canadian Natural Resource Ltd (USA) (NYSE:CNQ) remained steadily profitable: Its 2012 earnings of $1.7 billion came on over $15 billion in revenue and produced a nearly 12 percent profit margin. With long-term obligations of $9.5 billion and just over $18 million in cash, Canadian Natural Resource Ltd (USA) (NYSE:CNQ)’s biggest problem is clearly its outsized debt load.