Barrick to sell African assets?

It looks like Barrick Gold’s (ABX-T, ABX-N) new CEO Jamie Sokalsky is getting  down to business to help lift the company’s stagnating share price through a possible sale of its 73.9%-owned African gold subsidiary African Barrick Gold (ABG-L).
Sokalsky, who was promoted from CFO in June, appears to be renewing company efforts to allocate capital to projects that generate the most returns and scrap those that contribute high-cost ounces.

Barrick confirmed on Aug. 16 that it was in talks with China National Gold regarding the sale of part or all of its stake in African Barrick. Toronto-based Barrick spun out the unit in 2010 partly in response to chronic operating, management and community relations problems at the various mine sites in Tanzania.   

Under U.K. law, if China National Gold starts to acquire more than 30% of African Barrick, it would be required to make a full takeover offer for the subsidiary.

Canaccord Genuity analysts write in a note that this is the first step Sokalsky is taking to unload the company’s poorly performing businesses, Barrick has been under pressure as it wrestles with sinking profits, growing costs and investor disappointment with regards to its earlier investment decisions, including the $7.3-billion acquisition of African copper miner Equinox Minerals last year. It shares have fallen roughly 30% over the year, the analysts note.

African Barrick is debt-free and has four operating gold mines in Tanzania: Bulyanhulu, Buzwagi, North Mara and Tulawaka.
In the second quarter ended in June, it reported that three of those mines recorded average cash costs exceeding US$1,100 per oz. gold.

The parent Barrick’s total production for the period ended June 30 was 1.74 million oz. gold at average cash costs of US$613 per oz., of which African Barrick contributed 110,000 oz. at cash costs of US$950 per oz.

While divesting African Barrick would lower Barrick’s production base, it would also shrink its average cash costs and sovereign risk, writes U.K.-based Investec analyst Hunter Hillcoat in an Aug. 16 note.

African Barrick contributes around 8% of Barrick’s current gold production, and accounts for 10% of the entire company’s net present value using spot prices and a 10% discount value, according to BMO Capital Markets analyst David Haughton.
He suggests a potential takeover price range of £4.90 to £5.40 per share for African Barrick, which would amount to US$2.3 billion to $2.6 billion for Barrick. Any sale  would likely strengthen the company’s balance sheet and ease current free cash-flow pressure.

While the news that Barrick is considering unloading its Tanzanian assets may attract other gold miners in Africa as buyers, most analysts doubt a bidding war over the assets will erupt.

“While the deep underground South African miners [AngloGold and Gold Fields] could gain operating diversity from the ABG assets, in our view they have substantial organic growth options to pursue and do not necessarily ‘need’ to make a bid for ABG,” Hillcoat writes. “Neither do the other sizeable African players [Newmont, Kinross and Randgold].”