Barrick looks to sell its African assets

Barrick Gold’s (ABX-T, ABX-N) new CEO Jamie Sokalsky has gotten straight down to business to help lift the company’s stagnating share price through a possible sale of its African unit.

Sokalsky, who was hired in June, renewed the company’s focus to allocate capital to projects that generate the most returns and scrap those that contribute high cost ounces.

As part of the plan to tighten spending and optimize its portfolio, the world’s top miner is considering selling all or part of its African unit to a Chinese buyer.

The Toronto-based gold producer confirmed on Aug. 16 that it was in talks with China National Gold regarding its 73.9% stake in African Barrick Gold (ABG-L).

Under U.K. law, if China Gold wanted to acquire more than 30% of the London-listed miner it would be required to make a full takeover offer for Barrick’s stake.

This is the first step Sokalsky is taking to unload the company’s poorly performing businesses, Canaccord Genuity analysts write in a note.

Barrick has recently been under pressure as it wrestles with sinking profits, growing costs and investors disappointed with 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 comment.

To revive its performance and maximize shareholder value, the miner is looking to hand off its African unit, which it spun out in 2010.

The debt-free African Barrick has four operating mines in Tanzania, including Bulyanhulu, Buzwagi, North Mara and Tulawaka.

In the second quarter ended June, it reported that three of those mines recorded average cash costs of above US$1,100 per oz.

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 Ivestec analyst Hunter Hillcoat in an Aug. 16 note.

Currently, African Barrick contributes 8% of Barrick’s current gold production, and accounts for roughly 10% of the entire company’s net present value using spot prices and a 10% discount value, according to BMO Capital Market’s analyst David Haughton.

He suggests a potential takeover price range of £4.90-5.40 per share for African Barrick, which will amount to US$2.3-2.6 billion for Barrick. The potential sale would strengthen the company’s balance sheet and ease current free cash flow pressure.

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

“While the deep underground South African miners (AngloGold, Goldfields) 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,” says Hillcoat of Ivestec in the note. “Neither do the other sizeable African player (Newmont, Kinross, Randgold).”