Fuel Add to the Barrick Break-up Speculation
Contributed Opinion

1. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Barrick Mining Corp., Fortuna Mining Corp., Midland Exploration Inc., OR Royalties, Metalla Royalty & Streaming Ltd., and Fox River Resources Corp.
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Barrick Mining Corp. (ABX:TSX; B:NYSE) made management changes that would facilitate a split in the company, without any announcement to that effect. First, it formally moved Pueblo Viejo, its large joint venture mine in the Dominican Republic, into the new North American unit, with the Nevada assets (both the Nevada Gold Mines joint venture with Newmont and its new Fourmile project).

Secondly, it established a separate leadership structure to Reko Diq, perhaps suggesting the project is for sale. The former project director in Pakistan became COO for North America, again indicating that building Reko Diq is not a priority. These moves make it easier to split the company into North America and the Rest of the World, as well as possibly selling Reko Diq. (We know the Saudis are interested.) These moves were revealed in a letter to staff, though were not press released. And lastly, three senior people associated with former CEO Mark Bristow were let go.

Activist Builds Stake

Adding intrigue to the puzzle, activist investor Elliot Management has built a $700 million plus position in Barrick, making his firm one of the top 10 holders, according to a report in the Financial Times. Separately, the Toronto newspaper, The Globe and Mail, reported that Mick McMullen was in the running for CEO of Barrick. It is unclear where the information came from — perhaps McMullen himself, planting his flag. He had been mentioned as a possible CEO in analyst speculation.

Few other names have been mentioned seriously. McMullen is known as a fixer who has successfully sold troubled assets, notably selling Stillwater to Sibanye and Detour to Kirland Lake. CEO of Barrick would be a major step up from his past positions, but he is well regarded in the market, and his appointment would be viewed as confirmation of some kind of corporate reorganization.

Barrick To Agree to Mali Terms?

Lastly, in cleaning up the portfolio, Barrick said it was in advanced discussions with the Malian government to end the two-year dispute and regain control of the Loulo-Gounkoto complex. Reuters reported that a verbal agreement had been reached, quoting anonymous sources. Other reports suggest that Barrick will essentially agree to all of the government's demands, abrogating an existing contract.

Clearly, regaining the mine would increase company revenues and make a spin out of "rest of the world" easier, but it would set a poor precedent should any other government want to tear up its contracts. Presumably, Barrick would give up its right to international arbitration under its original contract.

A Split, a Sale, or a Rebuild: Unclear How Reorg Will Transpire

All these moves suggest that Barrick is preparing for a major corporate restructuring, the precise nature of which is unclear. It could be spinning off the rest-of-the-world assets into a separate company; it could involve the sale of at least a part of Reko Diq; or potentially, the sale of individual assets and groups of assets to other companies, slowly improving operations and the political risk-profile of the entire company.

Meanwhile, Newmont Corp. (NEM:NYSE; NGT:TSX; NEM:ASX) still hovers in the background as a potential suitor. They would likely buy the entire company and then sell the projects that they do not want (as they did with both Goldcorp and, more recently, Newcrest). It is likely that neither Newmont nor Barrick has yet firmly decided on the direction in which they wish to go.

Elliott's involvement suggests that there will be pressure for a near-term solution. One thing is certain, and that is that Barrick is selling at a meaningful discount to other major companies and on a sum-of-the-parts basis, with value to be released by a restructuring. Indeed, one could argue that the Nevada mines alone, where they to carry a Nevada premium, would be worth virtually Barrick's entire market cap.

At present, the entire company's valuation is dragged down by the discount applied to the high-risk jurisdictions. Barrick's share price has meaningfully outperformed (both Newmont and the index) since Bristow was pushed out at the end of September (though it had also been gaining ground before then (see Bulletin #982). Even so, it remains relatively undervalued.

Given the valuation gap as well as the fact that its stock has lagged over a multi-year horizon — it remains more than 30% below its 2011 high — we are holding, and aggressive investors can buy looking for a near-term reorganization that will release value.

Fortuna Increases Reserves at Flagship Mine

Fortuna Mining Corp. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) reported an 11% increase in reserves for its Séguéla mine, at 1.18 million ounces, more than replacing depletion, and extending the mine life to 7.5 years. At the same time, reserve grade declined, by 17%, largely because a higher gold price enables lower grade ore to be profitable.

The inclusion of the lower-grade Kingfisher deposit and the depletion of two higher-grade deposits, also contributed to the lower overall grade. Reserves were calculated at $2,300 gold up from $1,880 at year end.

At the same time, resources, in the Measure and Indicated categories, doubled, to almost 800,000 ounces. Fortuna is evaluating expanding the plant capacity to boost production.

With top management, a solid balance sheet, diversified assets and growth potential, Fortuna remains a Buy.

Royal Raises Cash With Junior Sale

Royal Gold Inc. (RGLD:NASDAQ) sold its 25% position in junior Versamet Royalties, which it acquired when it bought Sandstorm, to the Lundin family and Tether Investments for $207 million. The proceeds have been applied to its debt. The sale was not a surprise, though the 23% discount was, as was, given Royal's high debt level, its subsequent announcement of a 6% increase in its dividend.

Again, we are not surprised that Royal wanted to increase its dividend, for the 25th consecutive year. Though, given its need for cash, it could have done a small hike. Following the July announcement of the acquisition of Sandstorm and its affiliate company Horizon, which closed last month, Royal's stock has lagged other large royalty companies.

Given this, it's a Buy.

Another Midland Property Optioned

Midland Exploration Inc. (MD:TSX.V) optioned its Lewis gold property, in the Abitibi, to Barrick. This marks the company's second option agreement with Barrick. Though the payments to Midland are not particularly generous, and Barrick will be the operator, the transaction is a positive one in that it gets work done on a property that Midland was not working.

Barrick will have to spend $12 million in exploration over the next seven years to earn a 75% interest in the property, which is a healthy amount of exploration. With strong management, a solid balance sheet, and multiple high-quality partners on alliances, options, and joint ventures, Midland is as well positioned as any company for success. The stock price downside is extremely limited; the main "risk" is time.

Midland is a Strong Buy here.

Nestlé M&A Head Retires

Nestle SA (NESN:VX; NSRGY:OTC)  announced the retired of Head of Group Strategy Sanjay Bahadur after more than 40 years at the company. Recently, he had been responsible for identifying and executing on M&A transaction.

Nestlé is a Hold.

TOP BUYS this week, in addition to the above, include Ares Capital Corp. (ARCC:NASDAQ), OR Royalties (OR:TSX; OR:NYSE), Kingsmen Creatives Ltd. (KMEN:SI), Metalla Royalty & Streaming Ltd. (MTA:TSX.V; MTA:NYSE American), and Fox River Resources Corp. (FOX:CSE).