Depending whether you are a glass half full or a glass half empty type of a person, the previous six months have been either highly encouraging for shareholders in Acacia Mining PLC (LON:ACA) investors, or else the ongoing continuation of a deeply troubling period that began the moment the company was spun out from Barrick Gold Corp (TSE:ABX)(NYSE:GOLD) itself all those years ago.
Acacia, which once upon a time was known as African Barrick, has indeed had a troubled history. Indeed, mining industry experts often blame the downward spiral of the entire Tanzanian mining industry on the inept handling of community relations there by Acacia.
In particular, the operations in the north of the country, a very long way indeed from where Acacia's top brass have traditionally held court in offices in Dar Es Salaam, have proved troublesome. There have been riots. There have been environmental breaches. And people have been killed.
It is in that context that the Tanzanian government has been able to come down hard on the mining industry as a whole, and it’s in that context that Acacia Mining’s shares are 67% down on the 575p listing price that it debuted at nine years ago.
That’s the half-empty case right there, although if you’d bought in at the beginning, we’re actually talking two-thirds empty.
But the world was a different place then too, of course. The global financial crisis had barely got going, and mining companies across the board were enjoying much punchier valuations. And of course, for the seller, Barrick, that deal now looks very good indeed.
So much so that it may well be that Barrick will become tempted to re-absorb the assets it sold at such a premium, but for a much cheaper price.
There are several reasons why such a deal might make sense, both to Barrick and to the government of Tanzania.
The first is the change at the top of Barrick itself. The ink is barely drying on the merger document between London’s former gold mining champion Randgold and Barrick itself, and it’s perhaps even fresher on the contract of the new chief executive, former Randgold driving force Mark Bristow.
Seasoned mining investors will know that Bristow built up an enviable track record for Randgold as one of the most reliable gold mining companies in the world, built almost exclusively around a portfolio of African assets.
Thus Randgold brought into the Barrick stable considerable exposure to the Democratic Republic of Congo, for example, and to Cote D’Ivoire. A case could easily be made that both of those countries are far trickier jurisdictions than Tanzania. But more to the point, Barrick, which once ran from its African assets partly for fear of a lack of African expertise, is now teeming with the relevant skills.
Bristow knows how to operate in Africa, he knows how to do corporate deals in Africa, and he probably has several high-level ins right to the heart of the Tanzanian government.
From his point of view, a deal would be attractive on a number of counts. First off, even if Barrick ended up paying a premium to market for Acacia, it can be very plausibly argued that buying the same assets back at a much cheaper price than they were sold makes sense. And if the Acacia board pushes too hard for too much of a premium, then Bristow can push back by highlighting all the literal and financial goodwill that has been destroyed in the intervening period.
Secondly, it would establish Bristow as the major consolidator of gold assets globally, in a phase of consolidation that looks to be getting underway industry-wide. A deal ought not to be too hard to push through since Barrick still owns around 64% of Acacia’s shares.
And thirdly, for the half-full types, Acacia isn’t actually doing that badly just at the minute. Last year’s losses have turned to profit, and all-in costs remain attractively low at around US$890 per ounce. Bristow himself is a fan of low-cost operations and famously models all the Randgold operations using a gold price assumption of US$1,000, which is much more conservative than the industry standard.
What’s more, Acacia’s production, partly as a result of the ongoing disputes with the government, remains depressed. If Bristow backs himself to address and fix those issues, the growth that could be delivered from the Acacia suite of assets could be exponentially greater.
With the gold price still holding firm above US$1,300, it’s an interesting time to be in the sector. One thing is for sure, Bristow’s unlikely to stand still. If Acacia doesn’t come back into the Barrick fold, then the recent boost in share price may conversely herald an opportunity to sell. There has been talk before of potential Chinese buyers. Wither way the attitude of the Tanzanian government is likely to be crucial.