THE intended London initial public offering (IPO) of African Barrick Gold (ABG) presents a valuation puzzle. The company, as the name suggests, holds the African assets of Toronto-based Barrick Gold Corp.
African Barrick Gold's mining operations in the continent are located solely in Tanzania.
Barrick Tanzania is the largest gold mining company in Tanzania and operates four gold mines - Bulyanhulu, North Mara, Tulawaka and Buzwagi.
The world's largest gold miner will list 25 percent of ABG and hold on to the rest. The pricing is expected to be announced in March. But what is the golden number?
Deo Mwanyika, ABG's vice-president for corporate affairs told journalists recently that the new firm would list its shares on the Dar es Salaam Stock Exchange (DSE) after a successful London IPO.
If ABG were worth its proportionate share of Barrick -- roughly 10% of the production and reserves -- the market capitalization would be almost $4-billion.
But investors have to think about many things when valuing gold-mining assets: not only current profits, but reserves, expected future production and taxes.
Multiples vary greatly. Londonlisted Petropavlovsk PLC trades at 11 times 2009 EBITDA (Earnings before Interest, Taxes, Depreciation), while London-listed Randgold Resources Ltd. goes for 42 times, according to Reuters estimates. At the Petropavlovsk multiple, ABG would be worth $2.9-billion, $11-billion at Randgold's.
If reserves and resources are used as the metric, the gap narrows and reverses. The numbers are not exactly comparable but ABG would be worth just shy of $6.5-billion if it were valued on the same enterprise value per ounce basis as pan-Africanfocused Randgold, which is likely to have around 25 million ounces of reserves and resources when it reports updated figures next month.
Petropavlovsk had about nine million ounces at the end of 2008, according to people close to the company. By that measure, ABG's 25.9 million ounces of reserves and resources at the end of 2009 would be worth a bit more than $8-billion.
Randgold gets a premium EBITDA multiple valuation because investors like the miner's geographically diversified portfolio in Africa and a management team with a strong track record. They assign Petropavlovsk a Russian discount, and do not like the miner's early-stage iron ore assets and management's failure to deliver on production targets.
Investors will probably value ABG, whose assets are all in relatively benign Tanzania, somewhere between the two peers. Splitting the difference on the EBITDA multiple of enterprise values gives ABG a value of about $6-billion. That would probably be enough to please Barrick, which is not short on cash. At that valuation, its subsidiary would get into the FTSE 100.