Barrick, Randgold to forge world’s biggest gold miner

In one of the biggest and most surprising deals the gold industry has seen in more than a decade, Barrick Gold (TSX: ABX; NYSE: ABX) is combining with Randgold Resources (LON: RRS; NASDAQ: GOLD) in a share-for-share merger.

The business combination creates the largest gold producer in the world, with five of the world’s top-10, tier-one gold assets by total cash cost: Cortez and Goldstrike in Nevada, Pueblo Viejo in the Dominican Republic, Loulo-Gounkoto in Mali and Kibali in the Democratic Republic of the Congo (DRC).

The entity, called the “New Barrick Group,” will also have the highest margin for adjusted earnings before interest, tax, depreciation and amortization (EBITDA), and the lowest total cash-cost position among its senior gold peers.

Under the merger, valued at $18.3 billion, Randgold shareholders will receive 6.1280 New Barrick shares, meaning once the transaction closes in the first quarter of next year, Barrick shareholders will own 66.6% of the New Barrick Group and Randgold shareholders, 33.4%, on a fully diluted basis.

The deal values Randgold at US$6.5 billion.

Discussions between the companies started in 2015, but picked up over the last nine months.

Randgold CEO Mark Bristow, for many years an outspoken and salty critic of value destruction in the gold industry — specifically its short-term focus, undisciplined growth and poor returns on invested capital — will become the New Barrick Group’s president and CEO.

“Sadly, the industry still does not seem to learn from experience and fails to plan for the future,” Bristow declared in an address at Prospectors & Developers Association of Canada last year. “Instead of focusing on investing and profiting, it oscillates constantly between growth and survival. In the good times, it is often fixated on production growth, maybe through acquisition, which offers little or no returns to shareholders. In the lean times, as we’ve witnessed in the last three years, it has to sell often at a discount what it bought at a premium, incurring the inevitable impairments and writedowns, and sometimes even forcing to shelve development projects, because no one wants to buy them.”

But Bristow vows that the New Barrick Group will be “very different.”

“Its goal will be to deliver sector-leading returns, and, in order to achieve this, we will need to take a very critical view of our asset base and how we run our business, and be prepared to make tough decisions,” he said. “By employing a strategy similar to the one that proved very successful at Randgold, but on a larger scale, the New Barrick Group will leverage some of the world’s best mines and talent to create real value for all stakeholders.”

Randgold brings a debt-free balance sheet and a track record of execution in Africa with its Loulo-Gounkoto and Morila mines in Mali, Tongon in Côte d’Ivoire and Kibali in the DRC.

Over the last 20 years, Bristow has defined true value in the industry as an orebody containing at least 3 million oz. mineable gold that will deliver a 20% internal rate of return at a US$1,000 per oz. gold price.

Barrick’s executive chairman, John Thornton, will stay in his current role in the combined company.

“It fulfills our vision,” Thornton said of the merger on a conference call with analysts and investors. “Today we graduate from taking Barrick back to the future and with Randgold straight into the Twenty-first Century … Barrick and Randgold are cut from a single cloth. Randgold said it was modelled on Barrick … the very culture we at Barrick have spent the last four years working to recover. It is no accident that the two companies act and think the same way.”

Thornton noted Barrick and Randgold are “obsessed with talent and relentless with our pursuit of operational excellence,” as well as maintaining a strong balance sheet, and committed to per-share returns over the long-term, as measured by free cash flow per share.

“While we share the same culture, Randgold has the agility and sure-footedness of a young company, much like Barrick had in the early years, while Barrick has the infrastructure and global reach of a large, corporate company,” Thornton said.

Bristow confirmed on the conference call that he has committed to his new role at the company for at least five years and will have day-to-day operational control over the business, while Thornton will provide leadership at the board level and guide business decisions on the macro level. Two-thirds of the board will be appointed by Barrick and one-third by Randgold directors.

“At the heart of the merger is the two companies’ shared belief that a gold-mining business must calibrate itself to a changing market that demands real value creation to attract new investment,” said Bristow, who spoke on behalf of both companies for most of the conference call. “Barrick has been reformed over the last years, which … has reduced its debt quantum considerably, while also improving its security profile. It is now ready for a new growth phase. Randgold is the industry leader in terms of operation delivery, returns, margin and share price, [and] delivering superior cash flow. We will now be able to step beyond our African boundaries on to the global stage.”

Having the highest EBITDA margin and lowest total cash costs amongst its gold peers, Bristow said, means the larger company can invest in the business whilst returning capital to shareholders. The new Barrick “will have a diversified portfolio across terrains, prudent and disciplined management with a strong entrepreneurial flair, and a significant re-rating potential,” he added.

Going forward, Barrick will focus on four things: developing core assets and selling non-core ones; decentralizing management with mine-based, decision-making authority; streamlining all operations; and keeping a powerful balance sheet, supported by continued investment.

Bristow also noted that as Barrick has deleveraged a “radioactive” balance sheet, focused on optimizing free cash flow, cleaned up management, and developed a well-aligned executive team and strong commercial metrics out of its operations, the time has come to shift back to the business optimization model that looks to underlying orebodies.

Looking at Barrick’s assets, and the need to prioritize and rationalize them, Bristow noted that Nevada comes with “enormous potential” (“it’s like being a 13-year-old in a candy store”), while the Acacia investment in Africa “has become a bit of an orphan” (“it needs a home, some care, and some support and some nurturing — it’s got some real value, whichever way you cut it”), while assets in South America, like Veladero and areas in the continuation of the El Indio trend and under-explored terrain straddling Chile and Argentina all offer great opportunity.

And Bristow acknowledged that he is open to all ideas, admitting that he was one of those who had questioned Barrick’s decision in June 2017 to sell a 50% stake in its Veladero mine in Argentina to China’s Shandong Gold, because “it’s so hard to find 8 million oz. gold.”

“When you see the benefits the Chinese have brought already,” he said, “it was not only a good commercial decision, but it has brought … a new way of looking at things, and some tension among owners to advance that project, and not leave it dangling in the wind.”

As for Porgera in Papua New Guinea, in which Barrick and Zijin Mining each own 47.5%, “the big step is to renew the mining licence, and Zijin has the option to pick up the other half.”

At Hemlo in Ontario, meanwhile, Barrick has “a lot of work to do” before it decides “where that goes.” And mindful of the big tax shields in Canada, he added, “we should grow our portfolio in Canada.”

Bristow also acknowledged that there are Randgold assets that Barrick will need to call into question, but “certainly the big assets we will keep.”

“There’s no way we’re going to give up tier-one assets,” Bristow clarified. “Bringing to account some of the other assets, some are particularly good, but just don’t fit our geographical focus, or there’s a better use of proceeds, and we have partners that have indicated their interest in acquiring the Barrick stake. And John has been clear about what isn’t core and this [business] combination will bring the same debate over the whole portfolio of the combined entity, which will bring further opportunities to rationalize … some of which we will use to deleverage the balance sheet further.”

As for exploration talent, he added, the new Barrick’s will be second to none. “The combined exploration skill base in the form of the Barrick and Randgold exploration teams is going to be a cracker of a team, and we’re looking forward to letting them loose on a lot of these really controlled geological portfolios,” Bristow said.

In addition, both Bristow and Thornton are personally invested in the deal. “I’m rolling up my investment in Randgold into this transaction,” Bristow said. “John and I together stand out in the gold industry as executives that have significant skin in the game.

“I’ve always said what I don’t want to be in five years’ time is a CEO of a $60 gold stock, and this opportunity brings forward an exciting combination that fulfills everything I’ve been hammering on about ever since I can remember, and so this is a re-energizing event for me,” Bristow said. “I need one more big gold mine to get to the end of my career, and this is a very big gold mine with a lot of excitement.”

The new entity has a US$2.7-billion combined cash position and US$3.7-billion net debt, as of June 30.

Barrick’s guidance for 2018 is between 4.5 million and 5 million oz. gold at an average total cash cost of between US$540 and US$575 per oz., and Randgold’s is between 1.3 and 1.35 million oz. gold at an average total cash cost of between US$590 and US$640 per oz. gold.

The combined company will also grow its existing portfolio of copper mines and projects.

In another announcement on Sept. 24, Barrick reported that it has signed an investment agreement with Shandong Gold. Under the agreement, Shandong will acquire up to US$300 million of Barrick’s shares, and Barrick will spend the same amount to acquire shares of Shandong.

Jamie Koutsoukis, vice-president and senior analyst at Moody’s Investors Service, noted that 25% of Barrick’s production will come from Africa after the merger is completed.

“Barrick’s geopolitical risk profile will increase with the inclusion of Randgold assets, where there have been labour challenges in the Ivory Coast, a tax dispute in Mali and changes to the mining code in the DRC,” he said in a brief commentary. “This is in addition to challenges with Acacia Mining Plc (Barrick holds a 63.9% equity interest), where Tanzania imposed a ban on exports of mineral concentrates in 2017, and gave the company a $190-billion tax assessment. Barrick’s diversity of interests in over 15 operating mines [once the acquisition closes], however, does provide some offset.”

Raymond James analyst Brian MacArthur speculated that salable assets include Barrick’s Kalgoorlie (Australia) and Porgera, and Randgold’s Tongon and Massawa (Senegal).

Kerry Smith of Haywood Securities described Bristow as a “maverick” and a “well-regarded company builder,” who has “delivered superior returns over the last 20-plus years.

“Randgold has outperformed its peer group on shareholder returns over the past 10 years, delivering a 96% share price return, compared with Barrick’s return of -63%, and the sector [GDX Index] at -35% over the same period [in Canadian dollars],” he wrote in a research note. “On a cash-flow multiple basis, Randgold currently trades at CFPS enterprise value/2018 cash flow per share, well above Barrick at 7.8 times. Randgold has always traded at the top of the peer group, and with asset optimization and Mark Bristow’s entrepreneurial spirit at the helm, we believe there is potential upside as the New Barrick closes the discount price that Barrick has been historically trading.”