Barrick Gold-Randgold Merger: A New Gold Mammoth In The Making


Barrick Gold Corporation (NYSE: ABX) announced its plans to merge with Randgold, an Africa-focused gold mining company, in a share-for-share deal valued at $6.5 billion. The deal will result in the formation of a new company, “new Barrick,” which will be listed on both the New York and Toronto exchanges. The new entity is expected to be an industry-leading gold company with a focus on Tier One Gold assets, with the lowest total cash cost and one of the highest adjusted EBITDA margins in the industry. However, the merger is subject to approval by both sets of shareholders, regulatory approvals, and other customary closing conditions.

We currently have a price estimate of $11 per share for Barrick Gold, which is in line with the current market price. View our interactive dashboard – Barrick Gold & Randgold Merger – and modify the key drivers to arrive at your own price estimate for the company.

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Terms Of The Merger

As per the terms of the merger, a new company – new Barrick – will be created, which will be listed on both the New York and Toronto Stock exchanges. Each Randgold shareholder will receive 6.1280 new Barrick shares. Post the merger, which is expected to be completed by 1Q’19, Barrick Gold shareholders will own 66.6% and Randgold shareholders will own the remaining 33.4% of the new Barrick company on a fully diluted basis.

Further, each Randgold shareholder will be paid an annual dividend of $2 per share for 2018, at the close of the transaction, subject to Randgold’s Board’s approval. Also, each Barrick Gold shareholder will receive an annualized dividend of $0.14 per share, subject to the discretion of Barrick’s Board. As per the deal, the head office of the new company is expected to be in Toronto and is likely to generate cost synergies due to streamlining of non-essential costs.

Rationale Of The Deal

Under the deal, the new Barrick company will have a combined 78 million ounces of proven and probable gold reserves and the ownership of five of the world’s top ten Tier One Gold assets by total cash costs. A Tier One Gold asset is a mine with a stated mine life in excess of 10 years with 2017 production of at least 500,000 ounces of gold and 2017 total cash cost within the bottom half of the cash cost-curve.

Loulo-GounKoto and Kibali, two of the Tier One Gold assets developed by Randgold will be transferred to the new Barrick company. Randgold has an 80% stake in the Loulo-GounKoto mine and a 45% stake in the Kibali mine. In addition to these assets, Barrick Gold’s three Tier One Gold assets – Cortez mine, Pueblo Viejo (60%) and Goldstrike will also be held by the new Barrick. Further, two other potential Tier One Gold Assets – Goldrush mine and Turquoise Ridge mine, currently under Barrick, will also be a part of the new Barrick company’s portfolio. These high-quality low-cost gold mines will enable new Barrick company to maintain an overall total cash cost of  $538 per ounce (as per Barrick’s estimates), which will be the lowest cost in the industry. However, this cost is estimated to be $611 per ounce as per Wood Mackenzie.

Accordingly, the new entity is estimated to have the highest adjusted EBITDA of $4.7 billion and an adjusted EBITDA margin of 48%. A low-cost structure will also enable the new company to maintain the lowest gross debt to adjusted EBITDA ratio, and a strong balance sheet with a net debt position of $3.7 billion. Apart from the gold mines, the new company will own strategic copper businesses that produced 413 million pounds of copper in 2017. This will further complement the new company’s returns in the long term.

In addition to better returns, the new company will have a strong management team with a proven track record and a common vision of delivering long-term shareholder value. The management team is likely to divest non-core assets from the combined company and maintain a diversified portfolio with extensive land positions in some of the world’s most prolific gold districts. Further, the leadership team will leverage the innovation, technology, and experience of both the companies to ensure strong execution on the exploration of the mines, drive cost reduction initiatives, and deliver industry-leading ROIC (return on invested capital).

Thus, we believe that the deal will create a gold-focused mammoth that will own some of the world’s highest quality gold reserves and lowest cost structure. This may enable the company to generate superior returns for Barrick Gold and Randgold shareholders in the long term.

 

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