Barrick, with help from rising gold prices, sweetens its offer for Acacia
Toronto-based Barrick Gold Corp. on Friday announced a US$428-million all-share proposal to acquire the remaining 36 per cent of its troubled subsidiary Acacia Mining PLC, which has been locked in an escalating, years-long standoff with the Tanzanian government.
The deal is not expected to close until the fourth quarter, but would mark a victory of sorts for Barrick chief executive Mark Bristow, who had promised to resolve what he described as a “lose-lose” situation in Tanzania.
After months of hard-fought negotiations with Acacia shareholders over the value of their company, Bristow will be in a position to take full responsibility for negotiating a solution.
Tanzania in 2017 sent Acacia a US$190-billion tax bill and banned the export of gold concentrate, crippling Acacia’s operations. More recently, the government arrested Acacia employees, raised environmental concerns about its operations and refused to engage in negotiations with management.
“(The deal) is a good solution to a very difficult situation,” said Alan Spence, an analyst at Jeffries International Ltd. Equity Research. “It’s hard to see how Acacia would all of a sudden be able to improve relations in Tanzania.”
Bristow, a South African native, has built a reputation as a skilled operator in African countries, developing a network of top-tier gold mines during his time at Randgold Resources Ltd. in some of the most dangerous countries, including the Democratic Republic of Congo.
Since joining Barrick earlier this year, he has said his ability to negotiate on Acacia’s behalf has been hampered because his company is neither the mine operator, nor its sole owner.
“We can’t sign anything and we’re not prepared to be because we’re not in a position to legally,” he said on one earnings call. “So our only role is to play a messenger.”
Under the terms of Barrick’s proposal, Acacia’s minority shareholders can exchange each of their shares for 0.168 of a Barrick share.
That exchange rate implies a valuation of around 232 U.K. pence per Acacia share, which trade on the London Stock Exchange, a 24.2-per-cent premium to the closing price one day ago.
It is also 54.2 per cent higher than Bristow’s original offer on May 21, which he had steadfastly maintained would not be increased.
But after Acacia minority shareholders — 75 per cent of whom need to support the deal — said the original offer was too low, Barrick increased its offer by 10 per cent.
The increased offer comes after the price of gold broke through US$1,400 per ounce in late June, which has helped propel Barrick’s stock price up by more than 18.6 per cent in the past month to $22.42.
“Bristow was originally playing hardball, and the minorities replied very firmly,” said Michael Stoner, an analyst at Berenberg Bank. “Both sides played hardball.”
Stoner said the ultimate price is in line, though at the high end of his valuation, and “vastly” more fair than the original price.
Both sides played hardball
Still, Acacia’s shares are trading at less than half their peak in 2016, before tensions erupted with government regulators. Bristow has been candid that the company is in a tough position.
“The problem is that we are not prepared to overpay for these assets,” he said during an earnings call in February. “Right now, it’s really in a bad space and we need a lot of work to get that back on an even keel.”
Spun out of Barrick in 2010, Acacia has three mines, all in Tanzania, which have collectively produced on average around 500,000 ounces of gold per year.
But one mine has been put on care maintenance since 2017, one is near the end of its life, and the third, North Mara, considered the best asset, has come under scrutiny from Tanzania because of environmental concerns related to its tailings dam.
Spence, the Jeffries analyst, noted that annual capital expenditures at North Mara declined by US$35 million between 2016 and 2018, possibly indicating the company was hesitant to invest in the mine.
He said Barrick may try to sell one of the mines, while Barrick has already said it expects to sell Acacia’s exploration properties with proceeds flowing to minority shareholders as special dividends.
Meanwhile, Barrick, which has led the negotiations with Tanzanian government authorities, may now be in a better situation to end the standoff. As recently as February, it announced a solution that included a US$300-million payment to Tanzania and an agreement to split economic benefits from the mines on a 50-50 basis. But nothing was finalized.
“There’s a standoff of the two parties and we’re in the middle,” Bristow, who was travelling in Africa and unavailable for comment, said earlier this year.
Acacia had filed an international arbitration claim against Tanzania, which it stayed this week pending negotiations with Barrick.
Documents for the deal must be circulated to Acacia’s minority shareholders within the next 28 days and the company will hold a general meeting 21 days after the documents are released. Acacia management has already agreed to support the deal.
The deal must also receive court approval in the United Kingdom, because that’s where the company is listed, according to an Acacia spokesman.
Analysts expressed confidence that shareholders will be amenable to the deal, but noted there are many moving parts.
“The deal won’t close until the fourth quarter,” Stoner said, “so if the gold price falls, or Barrick’s share price falls … then, obviously, the implied valuation will change.”
Published at Fri, 19 Jul 2019 18:43:03 +0000