In an effort to become a more efficient gold miner while also remaining the world’s biggest, Barrick Gold (NYSE:ABX) announced Monday that it is buying Randgold Resources (NASDAQ:GOLD) for $6 billion in ABX stock. For every share of GOLD stock held, Rangold shareholders will receive 6.128 new shares of ABX stock.
Shareholders of both companies stand to gain from the merger, which is expected to close by the end of Q1 2019.
Barrick shareholders will own 66.6% of the $18.3 billion merged entity, while holders of GOLD stock will own the rest.
The merger solves some problems for Barrick while providing Randgold shareholders with the backing of an even bigger entity in the competitive gold mining arena.
“The combination of Barrick and Randgold will create a new champion for value creation in the gold mining industry, bringing together the world’s largest collection of Tier One Gold Assets, with a proven management team that has consistently delivered among the best shareholder returns in the gold sector over the past decade,” stated the joint press release.
GOLD Stock: A Top Notch CEO
Barrick hasn’t had a CEO since 2014. In the meantime, executive chairman John Thornton has been remaking Barrick by selling mines, closing mines and bringing in Chinese partners for some of its operations.
Randgold CEO Mark Bristol becomes the CEO of the merged entity, which will operate under the Barrick name. Bristow, who co-founded Randgold in 1995, was named to the Harvard Business Review’s 2016 list of the world’s 100 best-performing CEO’s.
Down 33% year-to-date through Sept. 21, GOLD stock has sold off hard in 2018, due to tax and other issues facing some of its African mines.
A no-nonsense leader who runs a very flat management structure, the Randgold way aims to deliver 20% returns on the properties it invests in all the way down to gold prices of $1,000 an ounce. By comparison, Barrick aims to produce a 15% return on investment based on gold prices as low as $1,200 an ounce.
“Its goal [Barrick and Randgold] 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,” Bristow stated in the joint press release. “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.”
An African Prize
Barrick expects to generate five-million ounces of gold in its latest fiscal year. Randgold will add 1.3 million ounces, putting it almost one-million ounces in front of Newmont Mining (NYSE:NEM), its next biggest competitor.
Together, Barrick will have five of the world’s top ten Tier One Gold Assets — defined as a mine that has an expected life of more than ten years, produces more than 500,000 ounces of gold and is low-cost — outperforming its competitors by almost every valuation metric.
For example, Barrick will have annual adjusted EBITDA of $4.7 billion, which is $2 billion higher than Newmont Mining and almost four times greater than Goldcorp (NYSE:GG), the world’s No. 3 gold miner by profitability.
On a margin basis, Barrick’s 49% adjusted EBITDA margin is 26% higher than the average of its nearest four competitors.
With the addition of Bristow to the mix, who has a strong understanding of the African mining industry and the tax issues involved, the merged entity ought to be able to do something constructive with its majority-owned Tanzanian operations, whether that means selling to Chinese interests or working a deal with the Tanzania government.
Either way, Bristow brings a strong understanding of Africa mining to the table.
The Bottom Line on GOLD Stock
One of the reasons companies make acquisitions is to buy talent. In the case of Randgold, Barrick is not only buying great mining assets, but it’s also getting top-notch talent as well — killing two birds with one stone.
I’m not a big materials investor, but if I were, Barrick would have to be significantly more attractive today after its merger announcement, than it was at the end of last week.
For shareholders of both companies, it’s a win/win situation.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.