Big hopes for giant gold mining merger
The proposed amalgamation of Barrick and Randgold will bring together five of the world’s top 10 ‘tier one’ gold assets
SA’s faltering heritage of being a gold-producing champion has been brought into sharp focus by the proposed $18.3bn merger of Barrick Gold and Randgold Resources.
Once, SA was home to the largest gold mining operation in the world; now it’s a shadow of its former self due to rising costs and policy uncertainty. But the good news is that if the merger is approved, it will create the world’s biggest gold producer, and it’ll be South Africans running the show. This is some comfort for a local gold industry in which there has been little investment: no new gold shafts have been sunk in over 20 years, and shaft closures are a regular occurrence.
John Thornton, executive chairman of Barrick, which is listed in Canada, will continue to hold this position at the merged entity, while SA-born Randgold CEO Mark Bristow will become president and CEO. Randgold CFO Graham Shuttleworth, also SA-born, will become the new Barrick CFO.
Randgold operates in African markets such as Mali and Ivory Coast.
Bristow in particular is spoken of by investment analysts as if he himself were the crown jewel of the Randgold Resources assets that will be obtained. "Not only is Barrick acquiring a dependable free cash flow-generating asset base in Randgold, it is also acquiring a CEO whose entrepreneurial and financial disciplined leadership style is the envy of the gold industry," analysts at GMP Securities write in a note. "Barrick shareholders should look forward to this enhanced discipline in key growth and investment decisions."
Led by Bristow since its founding in 1995, Randgold was once part-owned by notorious mining magnate Brett Kebble’s Randgold & Exploration. However, the company has always explored elsewhere on the continent for assets, and today it operates mainly in West Africa. It has no SA operations. Randgold Resources is headquartered in the Channel Island of Jersey and listed on the London and the Nasdaq stock exchanges.
Barrick Gold is familiar with being ranked number one in the world, a title it recently lost to Newmont Mining. Randgold has never appeared in the top 10.
The merged company will hold five of the top 10 "tier one" gold assets on the globe. These by definition produce more than 500,000oz a year, have more than 10 years’ mine life and operate at the bottom half of the cost curve. Three of these assets are owned by Barrick and two by Randgold Resources.
Randgold’s long-term strategy to discover new deposits and develop world-class gold mines in Africa many years back has now resulted in new gold production coming online at a time when global production is dwindling as new projects are few and far between.
Over the past 20 years Randgold has built four mines: three in Mali and one in Ivory Coast. Reserves at a fifth mine in Kibali in the Democratic Republic of Congo were not discovered by Randgold, but it doubled the reserves after its acquisition of the mine.
Barrick has come under pressure from shareholders in recent years for its declining production profile and shrinking gold output.
Randgold, meanwhile, has consistently grown its production profile from just over 400,000oz a decade ago to around 1.3m oz, and is a low-cost producer, according to Carey MacRury and Michael Fairbairn, analysts at Canaccord Genuity.
"Its share price has significantly outperformed its North American senior producer peers over the past decade, and notably, the company didn’t take any asset write-downs during the recent gold price downturn."
Analysts at Desjardins estimate equity gold production for the new Barrick to total an average annual 5.45m oz over the next two years.
This would come at a cost of $1,063 an ounce, compared with Barrick’s existing forecast of 4.23m oz at $1,125 an ounce.
MacRury and Fairbairn agree that the addition of Bristow as CEO is positive, with his successful record of building and operating mines over the past two decades, but they point out that reproducing Randgold’s model on a greatly increased platform of 5m oz to 6m oz a year "is likely to be a larger challenge".
The merger remains subject to shareholder approvals for both Barrick, which requires majority approval, and Randgold, which requires 75% approval.
If the merger is approved, Randgold shareholders will receive 6.128 Barrick shares for every Randgold share. Existing Barrick investors will own 66.6% of the combined entity, which will be listed on exchanges in Toronto and New York.
Desjardins analysts see the transaction as more favourable to Barrick shareholders than to Randgold shareholders: "Randgold offered shareholders disciplined capital allocation, leading free cash-flow generation and a consistent strategy; pro forma, this is at least partially compromised.
"Barrick shareholders transact accretively, gain world-class assets and a renowned management team — all at no premium."