Barrick chasing Randgold premium

[] — IS there a whiff of Afro-pessimism in the creation of African Barrick Gold? It might seem so at first glance.

The Canadian gold firm announced last month that it would “spin out’ its African assets into a separately listed company, estimated by some analysts to have a net asset value of about $5.5bn at the current spot price of gold.

The firm would be listed in London, have a 25% free-float, with the possibility of futher dilution of the parent, Barrick Gold, on acquisitions.

Aaron Regent, Barrick Gold’s CEO, said at an investor meeting last week a major driver of the listing was to ring-fence the African management team. The notion at play is that Africa represents a challenge to the group unlike anywhere else in any of its other geographies: North America and Australia.

Barrick operates four African mines, all in Tanzania. African Barrick Gold is expected to produce 800,000 to 850,000 ounces of gold in 2010, with total reserves of 16.8 million ounces as of December 31.

There’s no doubt that any mining firm operating in Africa runs the gamut of regulatory disruption, or resource nationalism as the concept has become known.

This is where host countries lift taxes or, as in the case of South Africa, political changes see the prospect of alarming new economic policies like nationalisation.

And of course, political risk in Africa is always higher than many other places, South America excepting. Just as Rio Tinto which has a special skill in operating in the most politically challenging of places: Madagascar (mineral sands), Guinea (iron ore), Zimbabwe (gold) and South Africa (fated aluminium smelter).

Hence the feeling that Barrick thinks Africa is a special needs case.

But I don’t think that’s quite it. Sure, there is an element of derisking Barrick Gold by lessening exposure to it, but there’s also the fundamental benefit that by giving management its own head, Barrick Gold will have a slightly smaller part of a more valuable unit.

The London listing is key to this. In the UK, there isn’t a wide choice for certain mandated funds of listed gold entities: Centamin perhaps, a firm operating in Egypt. Peter Hambro Mining is another.

In London, it’s all about Randgold Resources, the firm managed by the indefatigable Mark Bristow. Randgold trades at a huge premium, a premium rating based heavily on the fact it has a captive audience.

Barrick is also starkly aware that in Randgold and Bristow, the focus and understanding in and of Africa is peerless. Bristow is an Afro-realist. His highly cooperative attitude to local governments is not only an evolved view, it’s a commercially savvy one. Speak to Bristow about African politics: he’s well read and widely knowledgeable of recent history. He gets the ebb and flow of government in Africa.

Oh yes, there’s also the assets.

Personally, it’s hard to believe that if Barrick Gold wanted to externalise its African assets, it wouldn’t have first discussed the possibility of a merger of them with Randgold Resources.

Bristow is infamously cautious of corporate activity so it’s possible there were discussions between Barrick and Randgold that came to nothing, quite likely on the question of relative valuation, what else?

So better then to list African Barrick Gold and let the market independently set a value on the assets possibly with a view to fresh discussions with Bristow.

Kumba Iron Ore

Emboldened by a court decision allowing it to charge market related prices for its iron ore in the Sishen South project, Kumba Iron Ore has now told Arcelor Mittal SA it must pay full price for all iron ore produced by it.

Kumba Iron Ore has been providing Arcelor Mittal SA iron ore at cost plus 3% ever since the assets contained in the two companies were housed in Iscor, the now extinct integrated steel and mining company. As a single unit, that made sense, but now as separately listed companies with completely discrete shareholder bases, it really doesn’t make sense for Kumba Iron Ore.

Working against Arcelor Mittal is its market dominance. It recently avoided a massive anti-competitive fine on a technicality after DRDGOLD and Harmony Gold foughtly tirelessly in an effort to bring down the cost of its steel. But Arcelor Mittal has an image of top-doggery while Kumba Iron Ore is niche.

Kumba Iron Ore produced excellent financial results recenty, better than a lot of analysts expected so there’s no distress motivating its interest in lifting the cost of its iron ore to Arcelor Mittal.

For clues as to what’s going on here, look to 64.9% shareholder Anglo American’s hand behind this. Cynthia Carroll, Anglo CEO, needs to extract every last profitable penny from her South African assets if only to amerliorate the proforma net debt of $10bn in the group, double its recent operating profit. This one will be fascinating to watch.