China National Gold Targets African Barrick Gold

on Aug 21, 2012

China’s appetite for gold is growing. That trend is not exactly new, but it’s particularly apparent this year with the country expected to become the largest market for gold over the course of 2012. The latest move of the Asian giant is the targeting one of Africa’s largest gold mining companies – African Barrick Gold (ABGL.L).

According to the BBC, “early stage” talks have been held between China’s state-owned miner China National Gold and Barrick Gold, the parent of ABG the main topic of which was the possibility of China buying a stake at African Barrick Gold.
ABG has large reserves, but there have been some struggles lately. Meeting production targets havs been particularly problematic for the company.

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For now, Barrick Gold remains cool-headed about the prospects of a deal. In a statement the company said that “there can be no certainty that these discussions will result in the acquisition of all or part of Barrick’s holding in ABG.”
!m[](/uploads/story/276/thumbs/pic1_inline.png)Amongst the factors that may spoil a potential acquisition of ABG by China are the company’s recent difficulties which have lead many analysts to view the company as a risky bet. ABG has seen dropping production for a couple of years now. In 2011 production levels were at almost 688,000 ounces of gold, down from 701,000 ounces produced in 2010 and 716,000 ounces the year before.

At the same time, production costs have risen. The company reported that last year the production costs of one ounce of gold was $692 (£440), more than 20 percent higher than the previous year.
Power cuts and theft of fuel have also hurt the company.
All these mishaps have resulted in a significant plunge of almost 30 percent in stock price over the last year and analysts have been cautious to recommend the company to investors. However, some acknowledge the fact that ABG remains a solid company, owning some very strong assets and as such it could be an attractive buy for investor willing to make a riskier call.

“African Barrick has always looked like it offered good value albeit at a high risk, and if the potential acquirer can get the asset and is comfortable with the risk, you will be able to get a reasonable set of assets for a good price,” said Hunter Hillcoat an analyst with Investec.
And given its current strategy, China might just be that kind of investor. The Asian country has a significant portion of its reserves in U.S. dollars – around 1.2 trillion in U.S. Treasury bills. But the country has been rumoured to be seeking to diversify the reserves held at the People’s Bank of China, and gold seems to be the perfect asset for that. Acquiring gold mines with a lot of potential such as African Barrick Gold is now believed to be part of China’s strategy and the country certainly has enough muscle to see this through.


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