China makes foray into African mining with bid for Barrick Gold
If the acquisition succeeds, there is a higher probability of an emerging trend of mergers and acquisitions in the gold industry. Photos/FILE
What you need to know:
Canadian mining firm Barrick Gold is said to be concluding talks to sell all or part of its 74 per cent stake in ABG to China’s largest gold producer, China National Gold Group Corp (CNGG), a deal first announced on August 16.
The deal, analysts said, could lead to a sharp decline in traditional Western trading partners’ stranglehold on Africa’s mining sector as China scrambles to take over exploration and mining operations in Africa to satisfy its expanding domestic demand for commodities, especially gold.
China is banking on the proposed acquisition of a 74 per cent stake in African Barrick Gold Tanzania assets to drive its foray into the continent’s exploration business, which has been in the grip of Western firms.
Canadian mining firm Barrick Gold is said to be concluding talks to sell all or part of its 74 per cent stake in ABG to China’s largest gold producer, China National Gold Group Corp (CNGG), a deal first announced on August 16.
The deal, analysts said, could lead to a sharp decline in traditional Western trading partners’ stranglehold on Africa’s mining sector as China scrambles to take over exploration and mining operations in Africa to satisfy its expanding domestic demand for commodities, especially gold.
Last week, however, the ABG executives were non-committal over the conclusion of the deal.
“At this point, there can be no certainty that any transaction will be forthcoming,” said ABG’s chief executive Greg Hawkins.
“Should CNGG acquire more than 30 per cent of the voting interest in ABG, it would then be required to make an offer for the whole of ABG’s issued ordinary share capital,” he said.
A senior mining consultant at AfricaPractice, Teweli Teweli, said that with the deal the market would be less dependent on South African suppliers, who have dominated the sector since the 1990s.
But uncertainty is building around the 74 per cent stake deal.
“Given that Barrick appears motivated, there is concern over the price of any sale. If a deal materialises, the premium could be muted; if the deal evaporates, the stock will likely lose the takeover premium currently in the stock,” said J&E Davy, an Ireland-based financial advisory firm in a November research note to investors.
Late last month, Tanzania renewed two mining licences of African Barrick Gold for the North Mara project, both for a period of 15 years.
CNGG recently announced that it will accelerate its overseas acquisitions to secure resources abroad.
The announcement came at about the same time as the World Gold Council’s that demand for gold in China had hit a record high and that the country was set to become the world’s biggest gold market this year.
Barrick Gold Corporation cited high mining costs in Tanzania as one of the reasons for its decision to sell the assets.
Its Tanzania operations in ABG’s mines had a cost per ounce close to $800 in 2011, compared to its operations in South America at $300 per ounce while the current world market price per ounce is around $1,680.
Barrick’s chief executive Jamie Sokalsky told Reuters on November 12 that China’s increased demand for gold could lead to gold prices hitting $2,000 an ounce in 2013 as rising costs and production constraints held supply in check.
However, Mr Teweli said the motivation for China Gold and its probable impact has been largely overlooked because, whereas the motivation for Barrick to sell was based on the cost factor, the suitor might acquire the assets purely for domestic consumption.
“China is still a net importer of gold, despite being the largest gold producer in the world. In this scenario, even at current ABG production costs, China would access over 700,000 ounces a year at 50 per cent discount in comparison to China purchasing the same amount from the world market,” Mr Teweli said.
If the acquisition of ABG in Tanzania succeeds, Teweli says, there is a higher probability of an emerging trend of mergers and acquisitions in the gold industry as China moves to satisfy its domestic demand for the commodity.
In that case, taking over exploration and mining operating in Africa might be more economically viable than plugging the gap with purchases at world market prices.
Chinese choice
Already a Chinese mining company, Minmetals Resources Ltd, has gained a copper mine in the DRC after it bought Australia’s Anvil Mining Ltd in March. Another Chinese gold giant, Zijin Group Co. said in July that it planned to buy copper projects in Africa.
For obvious and more subtle reasons, Africa would be the obvious choice for Chinese companies looking to buy up exploration and producing assets owing to factors such as abundant cheap labour, a less stringent regulatory environment, easily traversed legal environments and historical ties.
Should this trend take hold, it may trigger a domino effect in the gold industry and the entire value chain of the mining industry, according to Mr Teweli.
For example, most juniors and exploration companies currently list on the TSX or LSE and use their drilling results to drive share price and court buyers from those markets.
China has enjoyed longstanding friendly ties with Tanzania in trade and investment since the 1970s, with the introduction of textile mills and construction of the Tanzania-Zambia Railway.
However, China’s entry into the extractive industry began recently when China and Tanzania signed a $1 billion loan agreement to build a 332-kilometre-long natural gas pipeline from Mnazi Bay and Songo Songo island in southern Tanzania to Dar es Salaam.
