Barrick Gold: The Transition Continues

Source: Thinkstock

Source: Thinkstock

Barrick Gold (NYSE:ABX), the world’s biggest producer of gold, announced Monday that it will divest part of its holding in African Barrick Gold (ABG). The company intends to place approximately $41 million shares of ABG, which represent about 10 percent of total shares issued or 13.5 percent of ABX’s holdings in ABG, to institutional investors. The Toronto, Canada-based Barrick Gold currently holds a 73 percent stake in ABG.

ABX has not provided any pricing details; however, based on yesterday’s closing price, the sale could total approximately $210 million. If we take into account the previous transactions in this space, the final pricing could be at a 5 to 10 percent discount from the closing price. Even if Barrick Gold is able to sell its stake at the closing price, it will still not materially impact the company financial flexibility. Nevertheless, the proceeds will still bolster the balance sheet and reduce some debt. The company had a total debt of $13.1 billion at the end of fourth-quarter 2013. Once the sale is complete, ABX will own about 63 percent of ABG.

Barrick Gold’s African assets consist of three gold producing mines located in Tanzania: Bulyanhulu, Buzwagi, and North Mara. ABX’s decision to divest part of its holding in ABG aligns with company’s strategy of divesting its non-core assets and continuing to optimize its portfolio.

Barrick Gold also held negotiations with China National Gold Group in 2012 to sell its entire stake in ABG. However, the miners could not reach an agreement on price and the negotiations eventually fell apart. While it could be possible that ABX is finding it difficult to find a buyer for its entire holding of ABG, it is more likely that the company is taking an advantage of the recent run in African Barrick Gold’s run. ABG is up more than 90 percent in absolute terms in the last three months and ABX is taking advantage of the situation to place blocks of its holding as an exit strategy, consistent with the company’s declared policy.

The announcement should not be surprising for investors and should be viewed as a positive, given this divestment is consistent with the company’s stated policy of optimizing its portfolio of assets. The majority of ABG’s assets are high-cost in nature and going forward, ABX is expected to continue to sell-down its ABG stake when the opportunity arises, given the ABG division represents a non-core, non-strategic position in ABX’s portfolio.

Relative to its peers, Barrick Gold operates in politically safe jurisdictions and has a high quality core of assets. However, the company carries a high debt level and has limited production growth in the coming years. The company has had a year of tough choices. It has managed to cut costs, divested assets, restructured its balance sheet, and continues to optimize its portfolio. Although the changes have been impressive and encouraging, the transition is not over yet. 2014 is another transitional year for ABX, as operational costs remain at 2013 levels despite the divestiture of higher cost mines and a leaner structure.

The company successfully restructured its balance sheet and now has $1 billion in debt due by 2017, down from $3.5 billion prior to its equity raise in October last year. However, despite of a near-term debt relief, the company’s balance sheet remains heavy. Barrick Gold remains a higher leverage company compared to its peers. In addition, an effective tax rate of 50 percent for 2014 and expected expenses of $400 million to 500 million at Pascua-Lama, Jabal Sayid, and Porgera will be a drag on 2014 earnings and will limit the company’s earnings potential.

Conclusion

Barrick Gold has been making the right moves and has made a good start in executing its portfolio optimization strategy. However, more is needed in 2014 including further reductions in below-the-line expense categories. While the company has managed to cut down its near-term debt payments, further debt reduction is needed given the drag on cash flows from interest payments. Overall ABX has made positive strides in addressing its portfolio and corporate structure, and 2014 should be another year focused on business optimization.

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