Weak demand for Barrick Gold Corp. (ABX:US)’s $3 billion share sale signals the worst isn’t over for the gold industry after slumping metal prices and rising costs at mining projects scared off investors.
The sale, expected to close tomorrow, was 75 percent sold, according to three people with direct knowledge of the offering who asked not to be identified because the information hasn’t been published. The financing is a so-called bought deal, meaning the banks managing the sale will be left holding unsold shares.
Barrick’s sale contrasts with strong demand for new shares in other North American industries this year, evidenced by Twitter Inc.’s $2.09 billion initial public offering and 73 percent rise on its Nov. 7 debut. Since Barrick’s sale was announced Oct. 31, gold miners have declined as the metal fell to four-week lows.
Weak demand for the sale is “very bad news for the industry,” says David Baskin, president of Baskin Financial Services Inc., which manages about C$570 million ($543 million).
“To the extent that there are still good names left in the precious-metals industry, Barrick is one of them,” Baskin said yesterday in a telephone interview. If Barrick’s stock sale faltered, “why would anybody think that a mid-sized or a junior would be able to raise money on any kind of terms?”
In a bought deal, banks buy the shares from the issuing company and then resell them, which means Toronto-based Barrick will get the proceeds, minus fees, regardless of the success of the sale. Barrick, the world’s largest gold miner, plans to use proceeds from its offering to redeem or repurchase debt.
The sale, led by Royal Bank of Canada, Barclays Plc and GMP Capital Inc., was 75 percent sold as of Nov. 8, according to the three people familiar with the situation. Demand for the largest equity offering in Canada since 2009 was unchanged as of Nov. 11, according to one of the people.
Andy Lloyd, a Barrick spokesman, declined to comment on the share sale when reached yesterday by phone.
Mark Lane, a Barclays spokesman, RBC Capital Markets spokeswoman Gillian McArdle and GMP Capital spokesman Rocco Colella declined to comment on the Barrick sale process.
Gold equities have tumbled 43 percent in 2013 as the precious metal heads for its first annual decline in 13 years. That’s spurred the world’s largest gold miners to take at least $26 billion of writedowns this year while they reduce spending plans and fire workers.
Barrick has come under further pressure this year as its debt increased and delays threatened to increase costs at its $8.5 billion Pascua-Lama gold project. Barrick announced Oct. 31 it was suspending construction at the mine on the Chile-Argentina border. The company also has considered cash-raising options ranging from a strategic equity investment to a sale of a stake in its copper business, people with knowledge of the matter said Oct. 30.
Barrick shares (ABX:US) traded at an average of $18.20 in New York from Nov. 1 through yesterday, about 0.8 percent less than the offer price of $18.35 a share. Gold futures in New York declined 3.6 percent in the same period.
Barrick rose (ABX:US) 0.7 percent to $18.15 at 9:43 a.m. in New York.
The take-up of Barrick’s shares was probably affected by the timing of the sale and a drop in the gold price that started Oct. 31, the day the bought deal was announced, said John Ing, chief executive officer at Toronto-based Maison Placements Canada Inc., which owns Barrick shares.
“It was Halloween, a lot of the traders had left for the day, normally you want everyone to be on board,” Ing said in a phone interview yesterday. “And they sprung it also at a time when the gold price had fallen apart, so there are some technical reasons as to why the issue did not go out the door that evening, which would be normal for a bought deal.”
Share sales by gold-mining companies are poised to decline for the fourth consecutive year to the slowest pace since 2005, even after Barrick announced its sale, according to data compiled by Bloomberg. There have been $4.97 billion of financings announced in 2013 as of yesterday, compared with $5.85 billion last year and a peak of $15.33 billion in 2009.
In the broader North American market, the volume of announced IPOs and secondary stock sales was up 3.4 percent this year to $271.4 billion from a year earlier, according to data compiled by Bloomberg.
RBC, Barclays and GMP led the 15-bank group that acquired 163.5 million shares in the bought deal. A smaller amount sold may mean fewer investment-banking fees for the banking group, which would have shared $90 million -- or 3 percent of the gross proceeds -- on a $3 billion sale, according to a regulatory filing from Barrick.
“There’s been more speculation over this than Area 51,” GMP Capital Chief Executive Office Harris Fricker said on a Nov. 8 conference call, comparing the stock sale with the U.S. military installation in the Nevada desert that’s been the subject of decades of speculation and conspiracy theories. “The actual results will demonstrate the prudence of taking on the transaction.”
The Barrick sale is Canada’s largest since September 2009, when the gold miner initially sought to raise $3 billion in a bought deal led by RBC, Morgan Stanley, JPMorgan Chase & Co. and Bank of Nova Scotia. That deal was increased to $3.5 billion on what Barrick called “strong investor demand” a day after its announcement, and after the transaction closed the banks exercised an option to buy additional shares, lifting the total to $4 billion.
Companies announced $28.1 billion of IPOs and secondary share sales in Canada this year through yesterday, down 21 percent from $35.5 billion in the same period a year earlier, according to data compiled by Bloomberg. More than half of this year’s amount, or $15.9 billion, has been through bought deals.
The share sale takes place against the backdrop of potential changes to Barrick’s board and the impending retirement of founder and Chairman Peter Munk. Barrick said earlier this year it’s considering adding new independent directors and changing its executive pay policies after issues were raised by investors.
The company amended a regulatory filing last week to note that the succession of Munk, who previously announced his intention to retire, was also one of the issues being addressed by the board. The company plans to provide an update on the changes before the end of the year and expects governance changes will take effect in conjunction with its next annual meeting.
“Barrick has just had a really bad string of events,” Kenneth Hoffman, a Bloomberg Industries’ analyst in Skillman, New Jersey, said by phone yesterday. “When things go badly, every little thing that can be perceived poorly is perceived poorly.”
The rest of the industry probably “cringed” when they saw the reaction to Barrick’s offering, Hoffman said.
“Part of it was they realized they could not do a financing any time soon, they couldn’t issue stock any time soon, because the Barrick issue did not go as planned,” he said.
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