Why Shares In African Barrick Gold PLC Plummeted

Shares in African Barrick Gold PLC (LON: AFB) shares have been on a tear, and its parent company is cashing in.

Mark Stones

Mark Stones (TMFMumbojumbones) joined The Motley Fool in 2014 and initially worked as a writer for Fool.co.uk, before joining the Fool’s analyst programme. Mark earned a BA in English from Loughborough University. Although he spends more time reading annual reports than Russian literature these days, he still appreciates a novelist’s antipathy toward the accepted view, which is a useful attitude when trying to sniff out hidden gems on the stock market. His approach to investing has been largely influenced by the principles of Warren Buffett and Peter Lynch. He also takes a special interest in the work of healthcare companies. Outside of investing, Mark plays guitar, enjoys good writing and has a guilty passion for combat sports.

Published 11 March, 2014 11:14 am GMT

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Although we don’t believe in timing the market or panicking over every stock fluctuation, understanding how a business is performing, competing and changing is vital to sensible investment.

What: Shares in African Barrick Gold (LSE: ABG) fell by 13% to 267p during early trade this morning after Barrick Gold, the world’s largest gold mining company, completed the sale of 41 million shares in its African unit.

So what: Barrick Gold has sold part of its stake in London listed African Barrick amid weak bullion prices as it tries to streamline its business. Barrick will still retain a 64% holding in ABG, deemed a non-core asset, while in the past it has attempted to sell its entire position.

Shares in ABG are up by 160% since July, meaning this was an opportunity for Barrick to sell down its stake and get a good capital return, bolstering its balance sheet and reducing debt.

This is part of a wider strategy to reduce its exposure to higher cost assets. Last year Barrick sold a number of its gold mines in Western Australia for $375m, retrenching to concentrate on its largest mines.

Now what: ABG’s chief executive, Brad Gordon, commented:

“This is a positive step by Barrick which significantly increases our free float. The placing is a reflection of the increased interest in the business as a result of the progress we are making as we continue to drive improved operational delivery from our high quality asset base.”

Mr Gordon has previously suggested that the company could be wholly independent within 12 to 18 months. Shares in ABG had earlier this month reached a 52 week high on hopes that production difficulties and other struggles in Tanzania would be turned around.

Because most placements are made at a discount to the market price — making them attractive to institutional investors — the fall in share price is concurrent with the size of the discount.

Of course, how advantageous the value the placing is to shareholders in the long term remains to be seen, and likewise we’re yet to see if the stock will rebound further on improvements to the management team.