Barrick Spins Off African Assets, Boosts Stake In Cerro Casale

Just months after eliminating Barrick Gold’s (ABX-T, ABX-N) fixed-price hedge book and a little more than a year after being appointed president and chief executive, Aaron Regent is making headlines again with plans to spin off the gold major’s African assets and buy an additional 25% stake from Kinross Gold(K-T) in the Cerro Casale copper- gold project in Chile.

The world’s top gold producer operates four mines in Tanzania and plans to set up a new Londonlisted company, African Barrick Gold, or ABG, to hold those assets and other exploration properties in the country.

The African assets make up about 10% of Barrick’s global production and 12% of its gold reserves, according to Vince Borg, Barrick’s executive vice-president of corporate communications.

Barrick will retain a 75% stake in ABG and offer 25% of the company in an initial public offering. The offering is expected to be priced in late March. ABG plans to have an initial cash balance of US$0.28 billion and the net offering proceeds will be paid to Barrick.

“This return of capital to Barrick is expected to provide increased financial capacity to fund the company’s pipeline of development projects,” the company said, in a statement.

ABG is also likely to list on the Dar es Salaam Stock Exchange in Tanzania.

Paul Burchell, an analyst covering Barrick at Dundee Securities in Toronto, says it’s difficult to comment on the decision until there is better clarity about how the assets will be valued. But from a purely strategic point of view, he says, the decision “makes sense.” Says Burchell: “It sets up a company that is devoted to Africa and is closer in terms of time zones.”

Barrick anticipates that ABG will produce about 800,000 to 850,000 oz. gold in 2010. As of Dec. 31 2009, reserves stood at 16.8 million oz.

Kerry Smith, an analyst at Haywood Securities in Toronto, argues that Barrick’s four mines in Tanzania benefit from being “geographically- focused” and will appeal to money managers and Africa-focused funds in London and elsewhere in Europe.

“There are a lot of Africa-dedicated funds and it will allow the new company to presumably do in Africa what Barrick might not have been interested in doing because it is really focused on its bigger assets in North and South America,” Smith says. He adds that over time and depending on the market reception African Barrick Gold receives, the gold major may decide to sell its position in the company even further.

“Eventually they may even do something similar with their Australian assets, as their growth projects are primarily in the Americas,” he predicts.

A U.S.-based analyst, who preferred anonymity, described the spin-off as both logical and interesting. “Senior producers get to the point where growth is a challenge and I think putting these assets into a separate structure that allows the new entity to do smaller acquisitions that are meaningful for their growth makes some sense. They’ve created an African entity that will be about 800,000 oz. with the ability to double production over something like five years.”

The analysts also seemed to like Barrick’s acquisition of an additional 25% stake in the Cerro Casale project in Chile from Kinross Gold for US$475 million (US$455 million in cash plus the elimination of a US$20 million contingent obligation which was payable by Kinross to Barrick on a production decision).

In its first full five years of operation, Barrick’s 75% share of annual production from Cerro Casale will work out to be about 750,000- 825,000 oz. gold and 170-190 million lbs. of copper at total cash costs of about US$240-US$260 per oz., the company says.

On a life-of-mine basis, Barrick’s share of average annual production is anticipated to be about 600,000- 650,000 oz. gold and about 170-190 million lbs. of copper at total cash costs of US$140-US$160 per oz.

“Barrick obviously sees value in the project and wants to increase their stake and gain control,” Burchell of Dundee Securities remarks. “By the same token, Kinross has made a decision to focus more on pure gold, pure silver, epithermal- style mineralization like Fruta del Norte, so large porphyry copper- gold systems perhaps don’t make so much sense in Kinross’s portfolio. So it makes sense to sell a portion of their share to Barrick and focus on precious metal assets.”

Smith of Haywood Securities says the US$475-million price tag for a controlling stake in Cerro Casale was a good deal. “They paid a pretty good price for it,” he argues. “They’re basically paying the same price as they would have for about 70% of El Morro, but are getting a much more gold-focused asset.”

In October, Barrick made a deal with Xstrata (XTA-L, XSRAF-O), which owns 70% of El Morro, to acquire the advanced stage copper- gold project in northern Chile for US$465 million. (That deal was derailed when New Gold [NGD-T, NDG-X], which holds the remaining 30% of the project, announced a plan to exercise its right of first refusal with funds from Goldcorp [G-T, GG-N]. Barrick is now suing both New Gold and Goldcorp to prevent that deal from going through.)

As for Kinross, notes the analyst who requested anonymity, it was a “win-win” because it “frees them up to pursue other interests, mainly in Ecuador and Chile.”

In Toronto, Barrick gained $1.29 or 3.3% to finish at $40.94 per share. In New York the Toronto-based gold major advanced US$1.37 or 3.6% to close at US$39.23 per share.