Hard Times for Tanzania-Focused Miner African Barrick Gold

On 23 July 2012, the Financial Times reported that while share prices for FTSE-featured mining companies were generally down by approximately 3 percent, one miner in particular saw its shares hit harder than most. African Barrick Gold’s (ABG) shares dropped by more than 7 percent, reaching 349.9p. It is, however, perhaps not entirely surprising, considering that, according to Bloomberg, the company reported that its profit for the second quarter of 2012 fell by 57 percent on account of declining output and expanding costs.

Bloomberg reports that African Barrick’s net income fell to $29.9 million from $69.8 million a year earlier, while attributable gold production fell 11 percent to 153,099 ounces.
The London-based ABG, which is among the top five gold producers in Africa, owns four producing mines in the northwest of Tanzania, together with several exploration projects at various stages of development, as noted on the company website.

!m[](/uploads/story/192/thumbs/pic1_inline.png)Despite its position as one of Africa’s biggest gold producers, ABG has been struggling to meet its output targets since 2010. Bloomberg notes that, in 2011, the company produced 688,278 ounces after a forecast of 700,000 to 760,000. One of the main reasons for the company’s difficulties is its problem with Tanzanian electricity, with the FT reporting that in 2012 African Barrick made a substantial investment in diesel back-up power so as to compensate for frequent blackouts from the grid, which in turn significantly increased its production costs for the first half of the year compared to the previous year.

According to the FT, the company aims to expand its operations to other parts of Africa and extend its production to one million ounces by 2014. The first step towards achieving this target is African Barrick’s decision to purchase the outstanding share capital of the Kenyan operations of the Australian company Aviva Mining (AVA), which has a joint venture project with Lonmin Plc (LMI) in West Kenya. The acquisition, which is pending approval by Aviva’s shareholders, was called by African Barrick’s CEO Greg Hawkins “an attractive entry into an underexplored and highly prospective land package”, as reported by the FT.

Yet, the news on the acquisition did little for the company’s stock performance with shares having fallen by over 20 percent since the beginning of 2012. Despite the difficulties, however, the company seems determined to stay on track with its annual production target of 675,000 to 725,000 ounces, while keeping within its stated cost target range of $790 to $860 per ounce. “We’ve had to keep a real strong focus and work our way through the first part of the year, which we knew would be pretty tough, but we’re confident about how we’re looking for the back half,” says Mr Hawkins, as quoted by Bloomberg.

As noted on the company website, one of the main steps for reducing cash costs will be assessing options to reduce reliance on diesel power generation as well as investment in grid stabilisation equipment to improve the quality of power supply. In the event that African Barrick does get back on track, the particularly hard losses the company’s stock has recently suffered could be viewed as giving greater scope for an attractive upside for those willing to bet on that eventuality.