Africa Barrick Gold's Buzwagi mine in northwest Tanzania
Jamie Sokalsky has made his first big move as Barrick Gold Corp.'s chief executive officer, putting the company's high-cost Africa unit on the block as part of a larger shift in strategy.
The world's largest gold miner is in preliminary talks to sell African Barrick Gold PLC to state-owned China National Gold Group Corp. A successful deal, which analysts expect would bring in about $2.5-billion, would give some financial relief to Barrick Gold as it struggles with billions in cost overruns at a key growth project in the southern Andes, and continues to absorb the $7.3-billion cash purchase of Equinox Minerals last year.
The negotiations, which the company said are "at an early stage," are a signal of intent by Mr. Sokalsky, who was appointed in early June to replace Aaron Regent, who was sacked by the board. The new CEO has pledged to focus on generating higher returns from its projects, rather than simply increasing production. They also highlight China's growing desire to be an owner of large-scale resource projects around the world, an ambition that led another state-owned corporation, CNOOC Ltd., to make a $15.1-billion bid for Calgary oil and gas producer Nexen Inc.
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 expenses in Tanzania stem from a host of factors related to its complicated terrain, political risk and even the need to train workers from scratch. The costs were a major reason why Barrick spun off the unit in an initial public offering in 2010, while keeping a 74 per cent stake.
"Those assets are all high-operating-cost assets, so I think a sale would make Barrick's cost profile much more attractive relative to peers," said Pawel Rajszel, an analyst at Veritas Investment Research in Toronto.
Analysts say Barrick will likely look at further divestitures as it struggles to right itself after some of the most tumultuous quarters in its history. After firing Mr. Regent, it announced a company-wide review of operations, pledging to shelve or sell assets that were not performing.
Its stock price, which reached $55 in 2010, has been battered by risk-averse investors who have questioned the company's direction as the industry battled aggressive cost inflation. It rose nearly 4 per cent on the African Barrick news, however, closing at $35.60 in Toronto.
Talks with China National Gold started several weeks ago, as global gold producers circled Barrick's assets following the CEO change. That was also when Barrick appointed John Thornton, a China expert and former Goldman Sachs president, as co-chairman of the board.
An acquisition makes sense for China National Gold, which has given a mandate to a Vancouver-based subsidiary, China Gold International Resource Corp. Ltd., to look for acquisitions to grow gold production at its Chinese parent. China is poised to become the world's largest gold consumer on an annual basis by the end of this year, the World Gold Council said this week. China Gold is that country's largest gold producer.
Still, analysts are taking the news with a pinch of salt, paying special heed to the language used to describe discussions. Like Barrick, China Gold International says the talks are "very preliminary."
"The question we would ask therefore is whether China Gold is a really keen buyer, or the only buyer in the market," Citigroup analyst Jon Bergtheil said in a research note.
A sale would just about cover the cost overruns of as much as $3-billion that Barrick is anticipating at Pascua-Lama, the gold mine it is building along the Andes mountain range between Chile and Argentina, facing construction delays of up to one year.
The company has shelved the Cerro Casale project in Chile and Donlin Gold in Alaska, and slashed a 2015 production target to eight million ounces of gold from nine million previously.
"In my view, rate of return should drive production, not the other way around," Mr. Sokalsky said in his first public statements at Barrick's helm on July 26, when he pledged to take steps to reverse the company's recent slumping stock price.
In 2011, African Barrick contributed 509,000 ounces of gold to the parent company's total output of 7.7 million ounces. In 2012, it expects equity gold production to be in the range of 500,000 to 535,000 ounces, reflecting its 73.9 per cent ownership.
With files from reporter Geoffrey York in Johannesburg