African Barrick Gold 352.1p 91.9 Questor says Buy
Shares in African Barrick Gold (ABG) have gone into a tailspin after a Chinese company walked away from talks about buying the miner. Has yesterday's plunge created a golden buying opportunity or should you steer clear of a business that has lurched from one operational crisis to another?
ABG is 74pc owned by Canada's Barrick Gold, the world's largest gold miner. ABG's four producing mines, located in Tanzania, were spun off in March 2010 and listed in London at 575p. The shares are now 38pc below the listing price.
Parent Barrick Gold had been in talks with the state owned China National Gold Group for a number of months. However, during the talks ABG was forced to cut its production guidance for the third year in a row.
Questor recommended selling shares in ABG when they were at 465p at the end of October arguing that "there is potentially more downside in the event China walks away than upside should a deal be struck". This has come to pass, with the valuation gap between ABG's management and the Chinese obviously being too wide.
China can afford to wait patiently for the right gold asset. Many of the major players in the sector are expected to sell a range of mines over the next couple of years, reversing the recent trend.
Gold miners have spent a staggering $69.7bn (£43bn) on 410 takeovers and joint ventures in the past five years, according to Bloomberg data. That's because management at most of the major miners have been focusing on growing their production and reserves as a way to drive the share price. This has not worked and share prices have remained in the doldrums.
Jamie Sokalsky, Barrick Gold's new chief executive, plans to unlock value by methods other than merely pursing headline production and reserve growth. This involves a review of all group assets to boost free cash flow, despite a backdrop of rising costs.
ABG is scheduled to issue its fourth quarter production update next week. The miner has been forced to reduce its output guidance this year to between 607,000 and 641,000 ounces from its previous 675,000 to 725,000 ounces. The main cause of the cut was continuing operational challenges at its flagship Buzwagi mine.
A review of ABG's entire business has now been launched and management hopes to give a more detailed timetable for news next week. Full year results are released in the second week of February, so hopefully we will get some insight into exactly what the new direction will be.
One positive announcement yesterday was that ABG plans to maintain its dividend this year, despite a plunge in free cash flow over 2012. After yesterday's share price falls, a payment of 16.3 cents implies a yield of 2.8pc, compared with an average yield of 1.3pc from peers.
Most analysts expect the gold price to soar in 2013, with many predicting it will pass the $2,000 an ounce level. This should lift gold miners from their current torpor. Also, Barrick Gold must be able to see value in the business or it would have sold to China to get the asset off its hands. This is a reassuring sign.
Questor thinks the shares could be an interesting play, with catalysts being the details of the group's operational review, potential further M&A activity and a resurgent gold price. However, the shares have to be rated as a speculative buy because of the above average risk.