Canada's Barrick Gold, the world's largest gold producer, plans to sell its 20 percent stake in Russia's Highland Gold, pulling out of one of the world's most promising - but also toughest - gold frontiers.
Barrick bought the stake in Highland, a venture backed by tycoon Roman Abramovich, almost a decade ago, with the aim of using it as a toehold to grow in Russia, home to the world's second-largest gold reserves after South Africa.
Instead, as Highland failed to significantly ramp up its production and with Russia still a tough environment for foreign miners, Barrick Gold has focused on its more lucrative U.S. and Latin American growth assets.
Highland, which missed its 2011 output target after hitting operational hitches, was Barrick's only major asset in Russia.
Highland's shares slid as much as 9.5 percent to their lowest since last June, as investors fretted over the loss of a major strategic partner. At current prices, the 20.4 percent stake is worth around 108 million pounds ($170 million).
One source close to the situation said Barrick chose to announce its plan to classify the holding as non-core -- despite not having a firm buyer -- after deciding not to appoint its allocated number of directors to the Highland board. No decision has been made on the timing or structure of a sale.
Highland is 40-percent owned by entities linked to Millhouse, Abramovich's investment vehicle, which said that a sale could be good for the stock as it could boost a freefloat currently around 30 percent.
One positive effect of the divestiture would be that it would increase the liquidity of Highland's shares, which would make the stock more attractive, Millhouse spokesman John Mann said. We view this as a positive development.
Mann said that Millhouse would not rule out buying part of the stake, but thought its current 40 percent shareholding is high enough to represent our interest in the company and give us a say in its management.
VTB analyst Nikolay Sosnovskiy said Millhouse might buy the stake with a view to selling it to another partner later.
I'm not sure it is a good time...to sell, but it may be a good time (for Millhouse) to buy from Barrick, then change the situation and sell to another party going forward, Sosnovskiy said. Maybe Barrick agrees to sell at a discount just to monetize this stake.
Other potential buyers for the stake in Highland include Russia's major gold producers such as Polymetal, analysts said, or foreign gold miners with an interest in Russia already, like Canada's Kinross.
Gold miners' valuations are currently at their lowest in a decade, though cash flows are still close to historic highs thanks to robust gold prices, making gold a likely hotspot for mining mergers and acquisitions this year.
Barrick plans to sell its stake in an orderly process and will work with Highland's largest shareholder, Primerod, through which Abramovich holds 32 percent of Highland. His partner, Eugene Shvidler, owns a further 8 percent stake.
AIM-listed Highland Gold said last month it had missed a reduced output forecast for 2011. In November, it had cut its forecast for the year because of difficulties accessing high-grade ore at one of its mines.
Barrick has been one of the core shareholders for so long and has been waiting for large growth projects from Highland Gold (to materialize), said VTB's Sosnovskiy.
Sosnovskiy said that in the last five years, production had been hovering at around the same level and Highland had still not started the active development phase of its key Taseevskoye project, which Barrick contributed to Highland in 2006 in exchange for an equity stake.
That's why (Barrick) has decided there is no reason to hold for the sake of an equity investment, said Sosnovskiy.
Shares in Highland, which currently trade at a discount to the sector, were down 1.2 percent at 1250 GMT, at 165.6 pence.
A source from one Russian gold company told Reuters that Highland's shareholders had tried to sell the whole company some time ago. However, Highland's head of communications Dmitry Yakushkin denied this. It is not true, he told Reuters.
Barrick, present in Russia since 1996, has appointed HSBC as its lead adviser on the stake sale.