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 1.30 billion pounds ($2.03 billion), based on African Barrick’s closing price in London today.

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.”

Photographer: Trevor Snapp/Bloomberg

Barrick Gold Corp.'s North Mara mine near the Tanzanian border with Kenya. Close

Barrick Gold Corp.'s North Mara mine near the Tanzanian border with Kenya.

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Photographer: Trevor Snapp/Bloomberg

Barrick Gold Corp.'s North Mara mine near the Tanzanian border with Kenya.

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 0.7 percent to close at 428 pence in London today. It’s up 8.7 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

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