The all-stock deal will create the world’s biggest gold miner with a $18bn market capitalisation, which will manage some of the most profitable operations in the US and Africa.
It will also bring together two of the biggest personalities in gold mining: John Thornton, the former president of Goldman Sachs who has run Barrick since 2014, and Mark Bristow, a pugnacious South African who founded Randgold in 1995.
The tie-up follows a dismal year for the gold mining sector, which has struggled to convince mainstream investors that it can generate enough cash to grown output and also increase shareholder returns. Barrick’s annual production has fallen from more than 8m ounces a decade ago to 5.3m today.
While the price of gold has fallen 9 per cent this year to $1,200 a troy ounce, weighed down by a strong US dollar, the two companies have fared worse. Shares in Barrick have dropped 30 per cent this year, while Randgold has fallen a similar amount as it has struggled with a number of issues, including a strike at one of its biggest mines and the prospect of a tough new mining code in the Democratic Republic of Congo.
The new company will produce 6.5m ounces of gold a year, eclipsing its nearest competitor, US-listed Newmont Mining. The group will be listed in Toronto and New York, meaning that London will lose its biggest gold stock.
“Our industry has been criticised for its short-term focus, undisciplined growth and poor returns on invested capital,” said Mr Bristow. “The merged company 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.”
The enlarged company will control some of the world’s biggest and most profitable gold mines, including Barrick’s Cortez and Goldstrike operations in Nevada and Randgold’s Kibali mine in the Democratic Republic of Congo and the Loulo-Gounkoto mine in Mali.
How well Mr Thornton and Mr Bristow work together will determine the success of the deal, said analysts.
Mr Thornton will retain his position as executive chairman at the enlarged company, while Mr Bristow will be chief executive, in charge of the day-to-day running of the mines.
“We will always have reservations when ‘alpha’ personalities take joint leadership of a company,” said Investec Securities analyst Hunter Hillcoat.
Both men have strong views on the industry and how gold companies should be managed. Mr Bristow has been a vocal critic of competitors, including Barrick, slamming their short-term focus and undisciplined growth plans.
The all-share agreed deal values each Randgold share at around £49, its closing price on Friday night. Shareholders will also be entitled to a $2 dividend.
Barrick is offering 6.128 of its shares for each Randgold share and has agreed to a $300m break fee. Randgold shareholders will own 33.4 per cent of the combined company, with the rest controlled by investors in Toronto-based Barrick. Shares in Randgold rose 5 per cent to £51.19.
“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),” said Michael Stoner, analyst at Berenberg.
Barrick and Randgold have been discussing a possible combination for the past three years, but the talks intensified in the last nine months with the two executives spending a total of 30 days together, thinking through the issues and problems.
Mr Thornton said: “There are no premiums in the merger because we strongly believe in the opportunity to add significant value for our shareholders from the disciplined management of our combined asset base and a focus on truly profitable growth.”
RBC Capital Markets said the tie-up might not be well received by Barrick shareholders because of Randgold’s African exposure and could leave the new company vulnerable to a bid from Newmont.
“We believe Newmont would be well positioned to make an offer for Barrick, given a Newmont combination with Barrick could take advantage of an estimated $300m in annual operating and overhead synergies in Nevada,” said RBC analyst Stephen Walker.
As part of the deal, China’s Shandong Gold, one of the country’s biggest gold producers, has agreed to buy $300m of shares in Barrick. Barrick will also buy the equivalent amount of shares in Shandong Mining, a listed subsidiary of Shandong Gold, Barrick said.
Experience of Africa risks helps seal deal
The ability of Randgold Resources to operate in challenging jurisdictions was singled out by Barrick Gold’s executive chairman John Thornton on Monday as he announced a $6bn takeover offer for its African-focused rival.
Mark Bristow’s deep knowledge of mining in Africa could help in negotiations with the Tanzanian government over Acacia Mining, in which Barrick holds a majority 64 per cent stake.
London-listed Acacia has been unable to export gold from the east African country for more than a year, following accusations that it had underpaid its taxes.
Its share price has plunged as a result and Barrick has been trying to end the dispute with Mr Thornton flying to the country last year to meet President Magufuli.
“Bristow has a solid record of navigating Africa risk and could provide important negotiating skills in dealing with Acacia,” said Andrew Kaip, analyst at BMO Capital Markets.
Mr Bristow’s record of building a leading gold producer in Africa could be useful in other ways. It could help ease concerns that Barrick’s purchase of Randgold will increase its exposure to risky and politically volatile countries.
“Barrick have talked about re-focusing on North America and more safe jurisdiction and then all of a sudden they’ve got 30 per cent of their production coming out of the nether regions of Africa. It’s a complete about-face, said Robert Gill, a portfolio manager at Lincluden Investment Management.
On a call with analysts, Mr Bristow said he saw a “huge opportunity” to work with Acacia to find a solution that “really delivers better value and more transparency in Tanzania”.
Since Acacia was informed of the export ban in February 2017, its shares have fallen more than 75 per cent and the company is now valued at just £530m.
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