Barrick Gold (TSX: ABX; NYSE:ABX) has sold part of its 74%-stake in its subsidiary African Barrick Gold (LSE: ABG; US-OTC: ABGLF), in a move to keep optimizing its portfolio amid weaker gold prices.
The Toronto-based senior announced that it would offer 41 million African Barrick shares to institutional investors, representing 10% of the subsidiary’s shares.
When the transaction closed, Barrick noted it sold the shares at £2.75 apiece, in an 11% discount to African Barrick’s £3.08 close on March 10. The transaction provided the major with £113 million (US$188 million) in proceeds, below the US$210 million expected by analysts.
The major previously failed to sell its majority stake in the Tanzania-focused producer to China National Gold Group. It had initiated talks with the Chinese firm in mid-2012, but the two were unable to agree on a price, and negotiations ended last January. Analysts at one point estimated that a potential deal could add up to US$3 billion to Barrick’s coffers.
Before that Barrick had contemplated selling its underperforming Tanzanian assets, but instead spun them out into a separate unit in 2010, hoping it could improve the operations and community relations at its mine sites.
That hope faded somewhat when African Barrick — a stand-alone firm — missed its production targets and faced social unrest. On one occasion in 2011, more than 800 armed intruders attacked the firm’s North Mara gold mine in a bid to steal ore, leaving seven dead.
It was only early last year that the struggling company initiated an operational review to boost its performance, reduce costs and shake up senior management, naming a new CEO in August. The results were rather pleasing, with more gold produced than anticipated at better cash costs.
Its three operating mines — North Mara, Bulyanhulu and Buzwagi — cranked out 642,000 oz. gold at all-in sustaining costs of US$1,362 per oz. in 2013, compared to 626,212 oz. at US$1,585 per oz. in 2012.
While all-in sustaining costs improved by 14% from the year earlier, it was still above Barrick’s costs of US$915 per oz. in 2013. The senior producer is set to divest or retool mines where it costs more than US$1,100 to produce a gold ounce.
BMO analyst David Haughton notes Barrick’s decision to unload part of its stake in African Barrick fits its “portfolio optimization strategy.”
Barrick’s CEO Jamie Sokalsky said that “this transaction allows us to realize some liquidity from our holding in ABG in keeping with our disciplined capital allocation framework and our ongoing program to optimize and lower the average cost of our portfolio.”
The major has already sold US$1-billion worth of non-core assets to strengthen its balance sheet. These assets include the Marigold mine in Nevada and the Kanowna, Plutonic and Yilgran South mines in Australia, as well as its energy business.
As part of the placement, Barrick has agreed not to sell African Barrick shares for 120 days, unless it has permission from the banks associated with the deal. The consent, however, is not required if African Barrick receives a takeover offer, or if Barrick sells 10–20% of its remaining 64% stake to a single buyer, given that the purchaser agrees to a similar restriction for the remaining lock-up period.
Barrick worked with UBS Ltd., J.P. Morgan Security and the Royal Bank of Canada on the placement.
Its shares were relatively unchanged by the transaction, closing at $21.99, while African Barrick fell 19% to £2.50.
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