Barrick’s share sale closes, no ‘cleanup trade’ expected

Barrick Gold Corp.'s blockbuster $3-billion (U.S.) share sale has officially closed, but for some underwriters there's more work ahead.

The deal, launched on Oct. 31 at $18.35 per share, has been a tough sell. By Thursday morning, roughly 20 per cent of the shares remained unsold, according to a person familiar with the transaction. Since the share sale is a bought deal, where underwriters buy the shares and resell them to investors, that means Bay Street firms are likely still sitting on a bunch of Barrick shares. Barrick stock closed at $18.11 in New York Thursday.

In legal terms, a share sale can "close" even if it isn't fully sold; the closing simply dictates that the underwriters who came together to collectively sell the stock have the right to break apart. Typically when there are unsold shares, the syndicate will agree to stay together and relaunch a mini deal for the unsold portion, known as a "cleanup trade," at a cut-rate price to get it off their books.

But that doesn't appear to be the case with Barrick's deal. Underwriters who have yet to sell the portion they were liable for are expected to be simply handed that unsold stock, according to another person close to the deal.

Handing out these shares doesn't preclude the underwriters from cutting the price in order to sell them off, but it wouldn't be a widespread co-ordinated effort across the entire syndicate.

Already there are signs of heavy trading volume from one of the lead underwriters. Royal Bank of Canada bought and sold roughly 17 million shares on Thursday. However, it is difficult to track the precise reason for this activity. For instance, Barrick is a big stock in a number of exchange traded funds and a number of index buyers, as they are known, needed to buy these shares simply to hold the appropriate weight of Barrick stock in their funds and may have simply transacted through RBC.

Still, RBC has been by far the biggest buyer of Barrick shares in Canada since the deal launched, and lead underwriters frequently buy stock to support the share price of deals that have gone awry. For the first 10 months of the year, RBC was only the fifth-most active buyer.

While a number of smaller syndicate members – those who were liable to sell smaller portions of the deal – have already unloaded what they needed to, the deal has been a tough sell in general. A number of investors balked at the offering because they wanted clarity on the company's corporate governance before buying in, while others are simply not interested in gold miners – especially one that has written off $13-billion in 2013.

At this point it is unclear who exactly is liable for the remaining shares, but Bay Street has kept a close eye on GMP Capital. Unlike RBC and Barclays Capital, the other co-lead underwriters, both of which have big bank balance sheets to support them, GMP has been hit by a slowdown in resource deals.

However, the independent investment dealer reported its latest quarterly earnings last week, and on the accompanying conference call GMP head Harris Fricker said the firm has more than enough capital to support the Barrick transaction.

"The company, if anything, is over-capitalized," he said. GMP has " a very sophisticated approach to taking on risk that includes a very specific assessment of capital. We are very comfortable with the firm's capital position, including all transactions currently in the market."

In total, the underwriters earned roughly $90-million in fees for selling the stock. Those who have already sold their portions will get the full fee, based on what percentage of the deal they were liable for. Underwriters who are still holding Barrick shares may not earn the full amount. Any stock sold at prices lower than the original $18.35 price will eat into the revenues earned.