Barrick Africa Talks Signal Start of Austerity: Corporate
Barrick Gold Corp. (ABX) Chief Executive
Officer Jamie Sokalsky is starting an austerity drive by seeking
to sell the company’s African unit to China National Gold Group
Corp.
The state-owned Chinese company is in discussions about
Toronto-based Barrick’s 74 percent stake in African Barrick Gold
Plc, the Canadian company said yesterday. The shareholding is
valued at about 1.29 billion pounds ($2.03 billion), based on
African Barrick’s closing price in London yesterday.
A sale would be Barrick’s biggest after it spent more than
$28 billion over 18 years on acquisitions to become the largest
gold miner, with 2011 output of 7.68 million ounces. Sokalsky,
55, who took over as CEO in June after his predecessor Aaron Regent was fired, has said he’s reviewing assets in an effort to
improve returns and cash flow as costs soar. Gold company shares
have dropped to their lowest relative to bullion in 28 years.
“A rationalization of Barrick’s portfolio of mines may be
overdue,” Greg Barnes, an analyst at TD Securities Inc. in
Toronto, said in a note yesterday. “It has clearly become very
difficult for the company to expand production above 8 million
ounces per year and effectively managing a company of the size
and scale of Barrick has been a challenge.”
Tanzanian Mines
Barrick received several expressions of interest in its
African Barrick stake in the past year, according to a person
with knowledge of the situation. The company wasn’t interested
in selling the asset until Sokalsky was appointed and began his
review, said the person, who declined to be identified because
the details haven’t been made public. Barrick isn’t in
discussions with any companies other than China National Gold,
the person said.
Regent, who joined Barrick as CEO in January 2009, put the
company’s four Tanzanian mines into the newly created African
Barrick 14 months later and spun off the company. African
Barrick would have more options to pursue and fund growth in
Africa, he said at the time. Regent said in November Barrick had
“no intention” of decreasing its holding in the company.
African Barrick, the biggest gold producer in Tanzania, has
struggled to meet production targets amid operational setbacks
since the spinoff and is forecasting the lowest annual output
since the stock began trading in London.
The shares have fallen 26 percent since the IPO in March
2010. Barrick has fallen 12 percent over the same period.
Randgold Resources Ltd (RRS), the biggest gold miner trading in
London, rose 26 percent.
Fewer Deals
Wu Zhanming, a Beijing-based spokesman for China National
Gold’s overseas operations, didn’t answer calls to his mobile
phone seeking comment.
The Chinese talks come after a decline in deals in the gold
industry as slowing global growth tightens credit availability.
There were gold 120 deals with a combined value of about $3.9
billion in the first half of the year, compared with 153 deals
valued at $12.8 billion a year earlier, according to data
compiled by Bloomberg.
The median multiple of earnings before interest, taxes,
depreciation and amortization that buyers paid in deals
announced in the past year was 11, the data show. African
Barrick (ABG) is valued at about at 4.7 times 2011’s estimated Ebitda,
according to data compiled by Bloomberg.
African Barrick rose 0.9 percent to 429 pence at 1:12 p.m.
in London. It’s up 9.2 percent since the Chinese talks were
confirmed. Recent gold acquisitions have involved premiums of
about 40 percent, indicating a potential bid of 550 pence a
share for African Barrick, Leon Esterhuizen, an analyst at
Canadian Imperial Bank of Commerce, said in a note yesterday.
African Risk
The company may be taken over for as little as 490 pence,
said David Haughton, a Toronto-based analyst at BMO Capital
Markets.
“I don’t see them getting a fairly hefty premium,” David West, a Vancouver-based analyst at Salman Partners Inc., said in
a telephone interview. “It is Africa, it’s fairly risky and
it’s a sizable amount of assets, which means your potential
acquirers out there are quite limited.”
TD’s Barnes estimates Barrick may realize pretax proceeds
of $2.6 billion to $3.2 billion from a sale, assuming the buyer
pays 0.9 to 1.1 times net asset value. Confirmation of the
Chinese talks may attract other interested parties, BMO’s
Haughton said.
“Potential acquirers would have to be willing to take on
the risk, they’d have to have the financial capability of
acquiring it and there’s not a lot of companies out there that
have that combination and also are willing to buy it,” Salman’s
West said.
Pascua-Lama
Sokalsky said last month Barrick will be stricter on
capital allocation and cash flow after warning its Pascua-Lama
mine may cost 60 percent more than previously forecast and as
rising costs outpace gains in the gold price. Pascua-Lama, which
lies on the Chile-Argentina border, may cost as much as $8
billion with initial output now expected in mid-2014 instead
instead of mid-2013.
Barrick is now targeting more than 8 million ounces of gold
output in 2015, rather than a previous estimate of 9 million
ounces in 2016. Production growth will be driven by rates of
return and “not the other way around,” Sokalsky said in a July
26 conference call.
Barrick’s largest acquisition was its $10.2 billion
purchase of Placer Dome Inc. in March 2006, which made it the
biggest gold producer. The company acquired Equinox Minerals
Ltd. in July 2011 for C$7.3 billion ($7.4 billion) to add a
copper mine in Zambia and another project in Saudi Arabia.
Equinox Deal
Standard Poor’s on July 30 cut Barrick’s credit rating to
BBB+ from A- with a negative outlook, saying the company’s
higher spending forecasts for the next two years would probably
limit its ability to reduce debt.
The decision to consider a sale of African Barrick “may
simply be a matter of them shoring up their balance sheet,”
Salman’s West said.
“They’re carrying a lot of debt, a lot of it from the
recent Equinox acquisition,” he said.
Barrick had total debt of $13.9 billion as of June 30,
according to data compiled by Bloomberg. The company’s free cash
flow appears to be under pressure in 2012 and next year based on
capital spending assumptions, BMO’s Haughton said. Proceeds from
an asset sale could help, while disposing of African Barrick may
also reduce Barrick’s capital spending requirements by $2
billion in 2012 through 2016, he said.
Barrick said the talks with China National are preliminary
and there’s no certainty they will lead to an offer. Should
China National acquire more than 30 percent of African Barrick,
it will be required to make an offer for the whole of the
company, Barrick said. China Zijin Mining Group Co. previously
indicated a preliminary interest in African Barrick, the
Financial Times reported Aug. 15.
“More than once Chinese companies have approached or
entered into discussions to acquire mining companies and/or
assets with no sale being concluded,” Barnes said.
To contact the reporter on this story:
Liezel Hill in Toronto at
lhill30@bloomberg.net
To contact the editor responsible for this story:
Simon Casey at
scasey4@bloomberg.net
Barrick Africa Talks Show CEO Controlling Cost
Trevor Snapp/Bloomberg
Barrick Gold Corp.’s North Mara mine near the Tanzanian border with Kenya.
Barrick Gold Corp.’s North Mara mine near the Tanzanian border with Kenya. Photographer: Trevor Snapp/Bloomberg
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