Gold, Africa and Barrick
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In 2010, Barrick Gold (NYSE: ABX) floated its African subsidiary African Barrick (NASDAQPTH: ABGLY.PK) on the London Stock Exchange while retaining a 74% majority interest in the company. African Barrick is Tanzania's biggest gold producer with 17 million ounces in gold reserves. Despite this, African Barrick's stock has performed badly since listing – down about 30%.
The poor performance is due to poor production numbers – only about 700,000 ounces this year versus the expected nearly 1 million ounces – thanks to being forced to mine low-grade ores. African Barrick also has had to constantly battle power disruptions in Tanzania which have also pushed up costs (forced usage of diesel generation for power). The company struggling to keep costs within its $790-$860 per ounce range, well above the parent company's target of $550-$575 an ounce. Costs were only in the $530 per ounce range in 2009.
The decision to possibly unload poorly performing African Barrick should come as no shock to investors. New Barrick Gold CEO, Jamie Sokalsky, is in a tightening mode, and a few weeks ago the company signaled that it was reining in its aggressive expansion plans, a review of vast portfolio of assets, and announced a renewed focus on disciplined spending. As Mr. Sokalsky said during his first earnings call, “Assets that do not generate target returns or significantly impact our ability to generate long-term free cash flow will be either deferred, shelved or divested.”
So, with the help of investment bank UBS, the parent company is looking to unload its stake in African Barrick as quickly as possible. The good news for Barrick Gold is that there seems to be no shortage of suitors for the firm.
Foremost among the suitors are the Chinese, who are hungry for more international gold assets. It is believed a Chinese buyer will substitute African Barrick's high-priced expatriate workforce with its own cheaper workforce. State-owned China National Gold is rumored to be at the front of the line and in preliminary talks currently with Barrick Gold about its African subsidiary. Another Chinese state-backed mining company and major gold producer, Zijin Mining Group, has also expressed an interest in African Barrick. But it is believed that its offer was too much of a low-ball offer and is not being seriously considered by Barrick Gold.
However, Zijin's interest in African Barrick has now sparked interest in the company from other gold mining companies. These companies are said to include AngloGold Ashanti ADR (NYSE: AU), Gold Fields ADR (NYSE: GFI) and Randgold Resources ADR (NASDAQ: GOLD). Gold Fields' main focus is on the deep mine shafts in South Africa's troubled gold industry and is interested is diversifying further into Africa on top of its existing open pit gold mining operations in Ghana.
Perhaps the better fit with African Barrick would be either Randgold Resources or AngloGold Ashanti. Both firms have been named as possible buyers of African Barrick in the past because they do mine geologically similar projects in greenstone belts in Africa. Randgold Resources, which has had a track record of building and running gold mines very successfully, has its operations mainly in the African nation of Mali. AngloGold Ashanti is a gold producer with operations in 10 countries including in South Africa, Namibia, Ghana, Guinea, Democratic Republic of the Congo, Mali and Tanzania.
The main attraction for all of these miners with African Barrick has to be its latest project in Tanzania, the Nyanzaga project. It is believed there are approximately 4.2 million ounces of gold located, in the Lake Victoria region, in higher-grade ores. It is this project which may turn African Barrick back into a growth story again. At least that is what the eventual buyer of the company must be hoping.
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