Barrick Gold Corp. has ended months of efforts to sell its African unit to state-owned China National Gold Group (CNGC), unwilling to settle for fire-sale prices even as it struggles to cover massive cost overruns elsewhere.
The assets had been up for sale as part of a revitalization strategy that was launched by the world's largest gold miner last summer amid a falling stock price and shareholder discontent.
The move leaves Barrick with a high-cost producer in African Barrick Gold PLC at a time when mining on the African continent is losing its shine for shareholders, who are wary of resource nationalism amid months of labour strife in African mines.
The end to the talks also underscores the fiscal discipline of Chinese state-owned mining companies, showing they are careful not to overpay for assets even as the country seeks ownership of mineral resources to feed booming economic growth.
Barrick chief executive officer Jamie Sokalsky, who took the helm of the Toronto-based miner in June after the ouster of predecessor Aaron Regent, engaged the Chinese as one of a series of bold moves to address investor backlash against Barrick, which like others in the sector pursued aggressive growth for years but failed to spark good returns for shareholders.
"These discussions were part of our ongoing efforts to identify opportunities to optimize our portfolio. However, we are approaching this in a prudent and disciplined manner and will only proceed with opportunities that generate acceptable value for Barrick," Mr. Sokalsky said in a statement Tuesday.
No other buyers are likely to emerge any time soon. "We've concluded the talks with China National Gold. We're not in direct talks with any other party," said Andy Lloyd, a Barrick spokesman.
Analysts had expected a sale of the assets to raise about $2.5-billion, bringing much needed financial relief to Barrick as it struggles with billions in cost overruns at the Pascua Lama gold project in the southern Andes.
Under Mr. Sokalsky, Barrick has deferred some $4-billion in planned spending on projects that did not meet rigorous investment criteria to help offset Pascua's costs. Barrick also shelved development of two multibillion-dollar projects, Cerro Casale in Chile and Donlin in Alaska.
Stock in African Barrick fell 20 per cent in London on Tuesday, putting its market capitalization at £1.44-billion ($2.3-billion). Barrick Gold Corp. shares were off more than 1 per cent in Toronto.
"We view the release as a mild negative for the share price, given public statements from CNGC late in December, 2012, that suggested that an offer could be forthcoming," RBC Dominion Securities analyst Stephen Walker said in a report on Tuesday. "We expect Barrick to continue to seek ways to optimize its gold mine and project portfolio in Tanzania and we believe that a disposal of the 73.9-per-cent interest in ABG remains the preferred option."
The mines of African Barrick – all in Tanzania – include some of the largest producers on the continent, but they are also some of the most expensive to run for a company that is otherwise among the world's lowest-cost gold producers.
The cost of producing an ounce of gold at the four mines was on average $938 an ounce in the first half of the year, compared to between $550 and $575 for Barrick as a whole.
Higher costs were due to factors such as Tanzania's complicated terrain, political risk and the need to train workers from scratch. The costs were a major reason that Barrick spun off the unit in an initial public offering in 2010.
Long a ravenous consumer of industrial metals like copper, China is expanding its strategy to own the resources it needs to feed booming economic growth, pushing into gold as it vies with India to be the world's largest consumer of the metal.
Yet even with trillions of dollars in reserves, Chinese state-owned companies have shown discipline in mining deals as they build a portfolio in the sector, moving slowly to ink deals and being careful not to overpay.
China Minmetals Resources Ltd., majority-owned by one of the country's largest state-owned entities, was quick to back away in early 2011 when Barrick trumped its $6.3-billion offer to acquire Equinox Minerals Ltd., a separate Africa-focused copper producer, for $7.3-billion.