On Monday, September 24, 2018, Barrick Gold Corp. and Randgold Resources Ltd. announced that they had agreed on a share-for-share merger that would create the largest publicly-traded gold company in the world. Under the terms of the merger, each Randgold shareholder will receive 6.1280 share of Barrick. At Friday’s closing price of $10.47, that represented a value of $64.16, a premium of only 0.4% to Randgold’s 9/21 closing price of $63.91. Since the announcement, however, both Barrick and Randgold shares have rallied, with Barrick rising 7% to $11.18 on 9/25.
The exchange ratio was set based upon volume-weighted average prices for both Barrick and Randgold. It qill give Barrick shareholders a two-thirds interest in the consolidated enterprise and Randgold shareholders the remaining one-third. Under the merger terms, Randgold shareholders will also receive a $2.00 per share dividend for 2018. Barrick shareholders will likely receive $0.08 per share in dividends before closing, bringing the full year distribution to $0.14.
Randgold owns and controls interests in several mines in sub-Saharan Africa, including an 80% stake in the Loulo-Gokounto mining complex in Mali and a 45% interest in the Kibali mine in the Democratic Republic of Congo. The company has considerable experience in managing mining operations successfully in complex jurisdictions. Randgold’s CEO, Mark Bristow, will become CEO of the new Barrick Group. (Barrick has been without a CEO since 2014.) Randgold’s CFO Graham Shuttleworth will become Barrick Group’s CFO. Kevin Thompson, Barrick’s Senior Executive Vice President of Strategic Matters, will hold the same position at Barrick Group.
As part of the merger, Barrick Group will install a new management layer consisting of Chief Operating Officers at its three major geographic regions. Catherine Raw, currently Barrick’s CFO, will become COO of Barrick North America. Willem Jacobs of Randgold’s general manager of operations for east and central Africa will become CFO of Barrick Africa (which will also include Barrick’s 63%-owned Acacia Mining subsidiary). Barrick has yet to name a COO for its South American operations.
Although the new management layer reverses part of the organizational restructuring that Barrick has undergone over the past couple of years – (The company said previously that the general managers of each of its mines would report directly to its President or CEO.) – Barrick and Randgold have apparently decided that the scale of the combined businesses is large enough to warrant regional COOs. Yet, Barrick said that its efforts to streamline its operations will continue with more possible restructuring and downsizing in the 12 months following the merger.
As noted, the share prices of both Barrick and Randgold have rallied since the announcement, even as most gold mining stocks have extended their declines. Investors have cheered the merger for several reasons (most of which have been highlighted by new Barrick’s management team): First, Barrick is addressing a concern of some investors about the mining experience of its senior management team. Mr. Bristow, a native of South Africa and a geologist who has been CEO of Randgold since it was incorporated in 1995, has been widely praised for his skill at managing the company. Second, with Randgold’s experience in Africa, there is greater hope of a quicker resolution to the problems at Acacia Mining, which is embroiled in a tax dispute with the government of Tanzania. Third, the merger adds two more “Tier 1” mines to Barrick’s portfolio, each with cash production costs below $700 per ounce. Fourth, Barrick Group will retain high operating (EBITDA) margins, while strengthening its balance sheet. Randgold itself carries no debt and although it operates primarily through joint ventures, its joint ventures appear to have very little debt.
The merger, which is expected to close in the first quarter of 2019, is still subject to normal contingencies, including the affirmative votes of both companies’ shareholders. On the conference call announcing the merger, a question was raised about the intentions of Mr. Bristow to stay on at Barrick Group. In response, he acknowledged that this new position would likely be the last of his career, but he intends to stay for at least five years.
Another potential issue is valuation. Randgold shareholders are getting one-third of the new company, which is in line with each company’s respective equity market value. However, Randgold accounts for only 13.3% of their combined revenues, 14.0% of combined EBITDA, 18.1% of combined earnings and 17.7% of combined proven and probable reserves. The disparity is due to valuation multiples, which are higher for Randgold. In order to sustain the combined valuation, the market must grant a proportional increase in valuation to the new Barrick. Besides the trend in the price of gold, new Barrick’s future operating, financial and share price performance will obviously depend upon how well the new management team executes. A favorable resolution of Acacia Mining would almost certainly be a good first step toward convincing the markets that this is indeed a new Barrick.
In conjunction with the merger announcement, Barrick also announced a strengthening in its relationship with China’s Shandong Gold Group Co. The two companies have agreed to a cross shareholding in which each would invest $300 million in the other’s equity shares. This expands their existing relationship, a joint venture at the Veladero mine in Argentina. Barrick and Shandong also continue to explore other opportunities at the Lama project in Argentina and along the El Indio Belt that straddles the Argentinian-Chilean border.
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September 25, 2018
Stephen P. Percoco
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