LONDON/TORONTO Barrick Gold Corp (ABX.TO), the world's top gold miner, is in talks to sell all or a part of its stake in its African arm to a Chinese buyer, the first big move by new boss Jamie Sokalsky to clear out its more expensive assets and revive a flagging share price.
News of the talks with China National Gold Group, which bills itself as the country's largest gold miner, saw African Barrick Gold ABGL.L shares close up 8.0 percent at 425 pence, as investors bet the buyer would pay a premium to help satisfy China's insatiable appetite for the precious metal.
If it goes ahead, the sale would be one of China's largest mining deals in Africa and its most significant incursion into large-scale gold mining on the continent to date.
Toronto-based Barrick Gold is grappling with falling profit, rising costs and the fallout from what some investors see as mistakes, including the takeover of Africa-focused copper miner Equinox Minerals.
Barrick ousted its previous chief executive in June, saying it was frustrated the stock had languished while bullion prices were surging. Its shares, which have fallen roughly 30 percent in the last year, rose more than 3.7 percent on Thursday in Toronto and New York, on news that it may sell the African unit.
Sokalsky, who was chief financial officer until June, is under pressure to show he is investing Barrick's cash wisely.
He has been reviewing the group's operations, including the 74 percent stake in the African Barrick which has disappointed investors since it was listed separately in London in 2010.
Barrick Gold produced 7.7 million ounces of gold in 2011 at total cash costs of $460 an ounce. Output from African Barrick accounted for 509,000 of those ounces, but total cash costs for these ounces was $692 per ounce.
"We are not surprised that Barrick is in discussion for the sale of its interest in African Barrick, given the new CEO's focus on capital allocation and review of its entire portfolio," said Scotiabank analyst Tanya Jakusconek in a note to clients.
Though it is one of Africa's largest gold miners, Tanzania-focused African Barrick has suffered setbacks ranging from villagers armed with machetes invading its North Mara mine to power woes and fuel thefts. At Wednesday's close, its shares were almost a third below their listing price.
Barrick said there was no certainty the talks would result in a bid for all or part of its 74 percent stake, worth almost 1.3 billion pounds ($2 billion) at current prices. Should China Gold buy more than 30 percent of the voting interest in African Barrick, it would be required to make an offer for the whole.
"These are very preliminary discussions. China Gold has not begun a detailed due diligence process yet, so any offer could take different forms," said one source familiar with the deal.
There was also no detail, after less than a month of talks, on the timing of a possible deal, as a British rule setting a 28-day deadline for a bid to materialize does not apply.
"African Barrick has always looked like it offered good value albeit at a high risk, and if the potential acquirer can get the asset and is comfortable with the risk, you will be able to get a reasonable set of assets for a good price," Investec analyst Hunter Hillcoat said.
CHINA INC MOVES IN
China, the world's largest gold producer, does not export the metal and has still been unable to satisfy soaring demand for gold bars and jewelry from domestic investors, seeking stores of value for their wealth.
The World Gold Council said on Thursday it expected Chinese demand to reach 850 tonnes this year, overtaking India as the world's top buyer. Metals consultancy GFMS estimated Chinese mine output last year at less than half that.
China has a small presence in Africa's gold mining industry.
A purchase of African Barrick would turn China Gold - a low-profile company outside its home patch, which has been seeking growth abroad and a foothold in Africa - into one of the African continent's top miners.
A spokeswoman for China Gold International Resources Corp (CGG.TO), the overseas flagship vehicle of China National Gold, confirmed that the state-owned Chinese company has held some preliminary discussions with Barrick.
If recent deals are a guide, analysts said Barrick would seek an offer at a premium - potentially over 500 pence per share. That would value its stake in African Barrick, which produces 700,000 ounces of gold annually, at 1.5 billion pounds ($2.4 billion) at a minimum.
Nomura analysts said recent gold transactions had an average takeover premium of 40 percent, with Endeavour Mining's (EDV.TO) offer for Avion Gold AVR.V hitting 57 percent.
"Anything north of 500 pence is not bad considering where they have been trading," Numis analyst Cailey Barker said.
Industry sources said Barrick was pushing for a public auction, as all major miners in the region would look at the mines - an unusually large set of assets to be put up for sale.
Analysts cast doubt, however, on the prospect of a bidding war against the Chinese suitor.
Sources familiar with the matter dismissed, in particular, talk of interest from Zijin Mining Group (2899.HK) (601899.SS), a Chinese copper and gold miner which this month took control of Australian group Norton Gold Fields, or from London-listed Randgold Resources (RRS.L).
Randgold CEO Mark Bristow told Reuters a deal could be "too complex. We are not a business that has been built on buying broken things and trying to fix them".
UBS is acting as Barrick Gold's financial advisor, while Norton Rose is acting as its legal advisor.
(Additional reporting by Brenton Cordeiro in Bangalore, Jan Harvey in London and Mike Erman in New York; Editing by Erica Billingham, Dan Lalor and Gunna Dickson)