ONE of the more important consequences of Randgold Resources’ proposed $18.3bn merger with Barrick Gold will be the injection of Chinese capital into the combined unit’s African gold and copper business, said the deal’s chief architects, Mark Bristow and John Thornton, CEO of Randgold, and executive chairman of Barrick respectively.
Acacia Mining, the 64%-held subsidiary of Barrick Gold, is currently in discussions with potential Chinese investors whilst Barrick as a whole was cementing its relationship with Shandong Gold. This followed announcement of a $300m investment by the Chinese firm in Barrick which is being returned with an equal sum in Shandong by Barrick.
Describing the character of the merger between Randgold and Barrick, Thornton said it would return Barrick to its fleet-of-foot, entrepreneurial past whilst Barrick brought Chinese investment which would work as risk mitigation.
It’s therefore possible Chinese investment could also come into play as the combined company disposed of non-core assets, many of them likely to be in Africa as the focus fell on Latin America and Nevada gold industries, especially the latter, the consolidation of which was highlighted several times by Bristow. It’s not entirely clear where Bristow stands on Acacia which is embroiled in a dispute with the Tanzanian government.
He said at a presentation that Barrick Group, the name of the combined company, would work at improving Acacia’s transparency, whilst a major synergy of the combination was that the existing corporate structure at Randgold would be sufficient to support the doubling in the African portfolio the merger would bring.
He also described Acacia as an orphan which profiled potentially as an unwelcome guest in Tanzania as its mines were unprofitable and therefore not tax-paying. “This is about tier one assets, high quality assets wherever they are, regardless of their location,” he said. “If you are operating unprofitable assets in emerging markets you don’t pay tax and you become unwelcome,” said Bristow.
Acacia’s dispute in Tanzania turns on government allegations that it under-declared the value of concentrate exports from its Bulyanhulu and Buzwagi mines. Thornton has recommended Acacia pay $300m to the Tanzanian government in a gesture of goodwill, and comply with newly enacted legislation providing the government with a free-carry in the company – a potential but controversial solution to the tax dispute that is yet to be run past Acacia’s minority shareholders.
“With Acacia thus far effectively cut out of the talks with the government about its future however, the gulf between what the Tanzanian government want and what New Barrick might be prepared to offer seems almost impossibly wide and it may tax even Mr Bristow’s legendary deal-making abilities to bring such a fraught dispute to a happy resolution,” said Charles Gibson, an analyst at Edison Investment Research in a note.
One African project that could fall by the wayside is Masawa as its chances of competing for capital became slimmer when set against the potential for consolidation in Nevada – a long-held strategic goal of Thornton – and the development of Lama and El Indio Belt in South America. The two companies said today they favoured organic growth of tier one mines.
“There’s no doubt that we will progress a feasibility study at Masawa to a bankable project,” Bristow said of the Senegal project which is yet to prove it can yield three million ounces of gold over its life or make a 20% return. “We will secure the mining licence.
“It is the best undeveloped gold project in Africa – and we have tested every dollar – but it will part of the portfolio. We will then make a decision on whether it stays in the group. We do have the unification of Nevada and it will compete for capital allocation,” he said.
Thornton also commented that the Chinese had done “the heavy lifting” in respect of Veladero, a mine in Argentina in which Shandong and Barrick are 50:50 joint venture partners, at a time when Barrick was cutting debt. “We all agree that this partnership [with Shandong] can also help us leverage our skills as we hunt down other tier one assets.”
This may well translate into the development of Barrick’s copper business including Lumwana, a copper operation in Zambia for which Barrick paid a huge premium – described recently by Thornton as possibly one of the world’s worst corporate deals. Bristow and Thornton fought shy of the possibility of spinning out either the combined group’s copper or African gold businesses.
