EDITORIAL: From Kebble to colossus
One sensible thing Brett Kebble did was to support Mark Bristow and Randgold
Who can honestly say life is not filled with rich ironies? One of SA’s most notorious business people, Brett Kebble, died in 2005, notionally in a kind of assisted suicide after his mining empire collapsed.
A small branch of that empire has now become part of what could be soon the largest gold company in the world. One sensible thing that Kebble did — perhaps the only sensible thing — was to support Mark Bristow and Randgold Resources, then a partly owned subsidiary of Kebble’s Randgold & Exploration.
Bristow wanted to start a gold mine — in Mali of all places. That small mine grew into a giant mining house. In the process, Randgold Resources became one of the top 10 performing stocks on the FTSE 100 over the past decade. It has never reported a quarterly loss or taken a write-down. And that, in the gold industry, is incredible.
That raises its own questions: why should Randgold investors give up the independence of the company for no premium on their existing share price?
At the weekend, the world’s second-largest miner, Barrick, and Randgold announced an unusual deal. First, it’s a nil-premium takeover by the Canadian company, valuing Randgold at around $8.5bn. Second, Bristow, who hails from Estcourt, will become the immediate boss of the larger group, catapulting him from the edges of the mining world to its pinnacle in an instant.
Shareholders of both companies, who must still formally approve the deal, immediately applauded the idea, and the share prices of both increased around 6%.
The deal also reflects on an unusual period for the industry as a whole. This peculiarity starts with the most crucial issue: the gold price.
The gold price is under enormous pressure because, after almost a decade in the doldrums, the yield of US treasuries is, at last, showing some upside. Gold’s traditional appeal is that it operates as something akin to a reserve currency and it is consequently a kind of investment safe haven. But investing in gold alone provides no dividend, so when the alternative safe haven, US treasuries, begins to provide both security and a small return, gold suffers.
On top of that problem, gold companies are still feeling the effects of the gold price spike of 2011 when it approached $2,000/oz. In those boom years, gold companies expanded fast – in hindsight, much too fast. The Financial Times notes that since 2008, the NYSE Arca Gold Bugs index, which includes Barrick and Randgold, has more than halved in value "as the industry has taken tens of billions of dollars of impairment charges on ill-timed deals and wildly ambitious projects".
In a sense, Barrick and Randgold are outliers in this process. Barrick has spent much of the last five years reducing its portfolio of mines and operations. Randgold never got carried away and is now one of the few in the industry which not only has no debt but also sits on a large cash pile of around $800m.
That raises its own questions: why should Randgold investors give up the independence of the company for no premium on their existing share price? There are some arguments why they should. One is that since Bristow will become the head of the new group, it is arguably not so much a takeover by Barrick but a takeover of Barrick. The assumption is that the value creation that Bristow generated in Randgold can be replicated, but this time on a larger scale. That may be possible, but it entails a large bet on the boy from Estcourt.
Another is that the deal gives Randgold shareholders international exposure. Five of the top 10 gold mines in the world will be owned by the new group.
In an inverted kind of way, all of this reflects on the parlous state of the local gold industry. Partly because of declining ore grades and deeper mines, and partly because the mining industry has been so poorly regulated, SA has become a backwater in the industry, a depressing result for a country that once produced two-thirds of the world’s gold. SA is now no longer exporting its gold. Instead, it is exporting its executives.