As gold prices cling stubbornly to the lowest levels in a year as US stocks continue their record-breaking tear, two of the world's biggest gold miners are sensing an opportunity. As the Financial Times reports, Canada’s Barrick Gold (the world's largest miner) is preparing to merge with Randgold Resources (its UK-listed rival) in an all-share deal that will create the world's biggest gold miner, with an $18 billion valuation and a dominant mining position in Africa.
Per the Wall Street Journal, Barrick shareholders will own 67% of Randgold, and Randgold investors will own 33% of Barrick. Put another way, Randgold shareholders will own 33.4% of the combined company, with the rest controlled by investors in Toronto-based Barrick. The deal still needs to be approved by shareholders.
More than the mining synergies (Barrick runs massive mines in Nevada and throughout South American while Randgold ha extensive operations in Mali and the Democratic Republic of Congo), WSJ and FT points out that the merger will bring together two outsize personalities in Barrick’s John Thornton, a former Goldman Sachs executive, and Randgold's Mark Bristow. Bristow and Thornton reportedly recently spent a month together hashing out the terms of the deal, though talks began all the way back in 2015. Should the deal close, Thornton will serve as chairman of the combined company while Bristow will take over as CEO.
According to the two companies, the combined firm would have generated revenue of $9.7 billion last year while adjusted EBITDA would have been $4.7 billion.
While Barrick has clung to its No. 1 spot, the company has struggled in recent years as its profitability has lagged behind Newmont Mining Corp., its closest rival by production volume. Barrick's portfolio of mines has also shrunk, with the company owning about one-third of the 30 mines it controlled back in 2013. Here's more from the WSJ:
Barrick’s gold production has also dwindled, falling more than 25% since 2013 to 5.3 million ounces last year. The acquisition of Randgold, whose production is focused on Africa and which produced 1.3 million ounces in 2017, will help make up the loss.
"The combination of Barrick and Randgold will create a new champion for value creation in the gold mining industry," Mr. Thornton said in a statement.
The combined group will own five of the world’s top 10 tier-one gold assets with two potential tier-one gold projects under development or expansion, the companies said. The new group will consider selling noncore assets over time, the companies said.
Toward the bottom of its story, the FT revealed that China-based Shandong Gold was essentially acting as a silent partner in the deal, buying $300 million of shares in Barrick, while Barrick will also buy the equivalent amount of shares in Shandong Mining.
For their part, analysts complained about the absence of a premium for Randgold investors, though they acknowledged that the deal offered important synergies.
"While this does not offer a premium, the production upside of the combined group under the leadership of Mr Bristow (who is likely to be relentless in terms of cost reductions), is likely to create arguably the go-to gold businesses globally," said Michael Stoner, analyst at Berenberg.
"For the London gold space, this is a disappointment, and takes away one of two large-cap, liquid names in the market (the other being Fresnillo)," he added.
Analysts at Numis said: "In our view, Barrick has a number of world-class assets but has acquired the reputation of being a poor steward of those assets, while Randgold has the reputation for delivering strong shareholder value in difficult operating jurisdictions."
Still, as performance in the shares of both companies has lagged behind gold itself, investors will be expecting the combined management to make significant strides in boosting value for shareholders. But given the reputation of each company's chief executive, the potential for a power struggle at the top could prove to be an unfortunate distraction.