As one of the higher cost UK-quoted gold producers, a stronger-than-expected precious metal price so far this year has made African Barrick Gold (ABG) one of the best performing mining equities as investors have breathed a sigh of relief that it can still squeeze a profit out of its mines in Tanzania.
As of last night (10 Mar), the shares had doubled in value since December 2013. Yet this renewed strength in its valuation has prompted majority shareholder Barrick Gold (ABX:NYSE) to sell a 10% stake at a big discount to the market price and reveal that it is free to sell more from July. That's ended the share price rally and put the stock into reverse.
The event has reminded the market there's a very real share overhang in African Barrick, hence why the shares have been marked lower than the price at which Barrick Gold has placed its first slug of stock. The miner falls 12.9% to 268.4p as the market seems to expect the remaining 64% holding will be dumped in the summer.
Barrick Gold first spun out its African assets into a separately listed company in 2010. Former African Barrick Gold chief executive Greg Hawkins told Shares at the time that the parent company couldn't find any gold opportunities that would 'move the needle' for its share price. Having a smaller, geographically-focused business – albeit still a multi-billion dollar company – would theoretically provide more independence to reinvest cash flow and make deals that would have an influence on its market valuation.
Sadly that didn't go to plan. The shares were in a general downwards trends for a long time after the IPO. Initially the miner suffered production problems and fuel theft. Security problems then dogged African Barrick's North Mara project. Rising costs were the next problem, followed by a collapse in the gold price.
Barrick Gold is expected to severe ties completely with the UK-quoted entity in the near future, marking a second attempt at an exit. It previously tried to sell African Barrick to China National Gold but ended talks last year.
Stockbroker Davy reckons the 10% stake sale implies that Barrick sees current levels in the stocks as at least approaching fair value and that the chance of a third buyer has decreased. Westhouse Securities comments: 'Barrick has made noises in the past about divesting, and this is confirmation that it is indeed looking to reduce its interest in ABG. We view it as a positive for ABG as the management team should get increased flexibility with regards to how it runs the company's operations. The move should also help to improve the liquidity of the shares going forwards.'