The sky-high gold price has lifted all miners of the metal, but some investors believe there’s more value to be gained through corporate action, which is why Barrick Mining is outperforming its peers as pressure grows for a value-creating breakup.
Over past week, as the gold price has shed the best past of $200 an ounce Toronto-based Barrick has seen its share price rise by 5.4%, comfortably outperforming arch-rival Newmont which has slipped 4.5% lower.
As both companies produce the same metals. mainly gold and copper, the only explanation for the difference is speculation that activist investor Elliott Management has secured a large stake in Barrick and will soon agitate for change.
Top of Elliott’s list is likely to be a de-risking exit from troublesome jurisdictions such as Mali and Pakistan and a sharper focus on safer countries, especially the U.S.
Details of Elliott’s recently acquired stake in Barrick have not been revealed but The Financial Times newspaper reckons it is on the miner’s top 10 shareholder’s list which points to a holding valued at $700 million.
Long rated as one of the world’s most successful, and aggressive mining companies, Barrick grew from African roots under the tight control of South African businessman Mark Bristow.
A willingness to explore and develop mines in countries shunned by his rivals saw Bristow claim the title of the world’s top goldminer, until the problems associated with Mali, Pakistan and other high-risk countries led to internal calls for a pullback to safer jurisdictions.
Those calls grew louder when Barrick effectively lost control of its Loulo-Gounkoto mine in Mali after a tax dispute with the country’s government that reached the stage of company executives being imprisoned and an arrest warrant issued for Bristow.
A commitment to the $9 billion development of the Reko Diq gold and copper mine in north-west Pakistan, near the borders with Afghanistan and Iran, further stirred concern about the challenge of investing in high-risk regions.
That concern was magnified when a major discovery was made by Barrick close to its biggest U.S. mine in Nevada, presenting the company with a long-life, high-grade, development opportunity which far outweighed the risks of Africa, Pakistan, Ivory Coast and the Democratic Republic of Congo.
Enter Elliott
The Mali crisis is believed to have sparked a boardroom debate at Barrick about Bristow’s approach to risk, leading in late September to his abrupt resignation and clearing the way for an activist such as Elliott to build a stake in the stock.
If the Barrick board wasn’t already planning to split the company into low-risk and high-risk centers of operation that’s something Elliott could demand effectively creating a “Good Barrick” and a “Bad Barrick”.
The best asset in Barrick is its 61.5% owned Nevada business which has Newmont as the owner of the residual 38.5%.
But Barrick’s position in Nevada has been strengthened by a discovery just outside their joint venture area. The Fourmile discovery is high-grade and large tonnage described by Bristow at a mining conference in mid-September as “one of the century’s most significant gold finds”.
Wider Sector Consolidation
Two weeks after that claim Bristow left Barrick, replaced by the company’s head of South American and Asia Pacific operations, Mark Hill.
The shake-up underway at Barrick might not only lead to the split of the company into two separate businesses but could trigger a wider period of consolidation in the gold industry where share prices have generally not kept pace with the underlying gold price.
A full merger of the Nevada interests of Barrick and Newmont could be a first step in the consolidation process, possibly being made easier with the departure of Bristow and the carve out of high-risk mines in Africa and Pakistan.
A pure-play North American goldminer would almost certainly attract strong investor interest.