Perhaps Barrick Gold Corp. shouldn't look at the collapse of the contemplated sale of its 74-per-cent-owned African Barrick Gold PLC to China National Gold as a lost opportunity. Maybe it's a blessing in disguise.
While details of what went wrong in the talks are sketchy, it certainly sounds like China National pitched a low-ball offer that Barrick refused to catch. Despite the fact that Barrick is looking to sell, the Canadian miner clearly believes the potential of the Tanzanian gold assets held by London-listed African Barrick deserves considerably more credit than is implied by the current bargain price for its stock – which took a tumble after African Barrick slashed its 2012 production guidance in October, and plunged another 20 per cent Tuesday on the China National news.
Barrick's desire to sell isn't hard to understand. African Barrick's cash production costs are a gaudy $970 (U.S.) an ounce – sticking out like a sore thumb at Barrick, which is the lowest-cost producer among major gold companies, at about $580 an ounce throughout its operations.
Meanwhile, Barrick is saddled with the biggest debt load in the gold sector – a spine-bending $14-billion (U.S.) at last count. Debt-rating giant Standard & Poor's cut Barrick's credit rating last July, then warned last month that Barrick is the most susceptible among North American majors to another downgrade – a drop in the gold price of about 25 per cent could trigger a second rating cut.
Put it together, and you get a pretty good argument to sell: By doing so, Barrick would get rid of a high-cost underperformer and, at the same time, raise a nice chunk of change to lessen its debt burden. Barrick could laser-focus its financial resources on the likes of its Pascua-Lama project on the Chile-Argentina border, which despite soaring capital costs, will be one of the lowest-production-cost mines in the world when it's completed.
Now, with China National out of the picture, Barrick looks to be stuck with African Barrick for a while. While the asset isn't officially off the market, Barrick has indicated that it isn't talking with other prospective buyers.
Yet African Barrick may be an ugly duckling with swan potential. It's sitting on more than 17 million ounces of proven and probable gold reserves, and is pursuing a couple of expansion projects that would add 30 per cent to its production over the next two years, at much more palatable cash costs in the $600-an-ounce range. The company has zero debt.
And it's cheap. African Barrick's stock is trading at just 0.8 times book value. Analyst David Haughton of BMO Nesbitt Burns noted that the stock is going for a mere 0.7 times net present value, 30 per cent below its peers. Based on Monday's market capitalization, the market is paying about $135 per ounce for African Barrick's reserves – a little more than half of what it is paying for Barrick's reserves.
Maybe Barrick should just buy African Barrick itself. The minority stake in the company is valued at less than $600-million now. Yes, the production costs are high, but Barrick can shoulder them for a while, given its low-cost portfolio elsewhere. There is scope for vast improvement in costs, as well as ample room for growth. If Barrick can unlock the potential, a minority buyout would look like an absolute steal a few years from now.
David Parkinson