Barrick Gold’s Profitability Likely To Improve Through 2020 Due To Synergies Generated By Its Merger With Randgold Resources

by Trefis Team
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Having received approval from shareholders of both the companies in November 2018, the $6.5 billion merger of Barrick Gold Corporation (NYSE:ABX) and Randgold, an African-based gold mining company, is all set to take effect from January 2019. The new entity, with a combined revenue generating capacity of $10 billion, will own five of the world’s ten lowest-cost gold mines. We expect the combined entity’s revenue to be ~$8.9 billion and $9.5 billion in 2019 and 2020, respectively. Costs of $6.5 billion (excluding finance and tax expenses) in 2020 – slightly lower than 2019E costs – on the back of an efficient supply chain, better working capital management, and Randgold’s higher gold grades, is expected to push the EBIT margin to 25% in 2019 and further up to 30% in 2020 from a low of ~11% in 2018.

View our interactive dashboard – How Much Synergies Can Barrick Gold Generate In 2020, From Its Merger With Randgold Resources? – and modify the key drivers to arrive at your own EBIT margin estimate for the company.

Revenues of $9.5 billion in 2020 would likely be driven by increased demand for gold as an investment hedge against an expected slowdown in markets. In contrast to the previous 2 years, we expect gold volumes and price to increase, in turn leading to higher revenues for New Barrick Company. Additionally, we also expect an increase in copper revenues due to higher pounds sold and an increased price level. This would mainly be driven by increasing sales of Electric Vehicles (EVs) year over year, which require copper to a large extent.

The combined entity is expected to benefit from Randgold’s superior gold grades over its rivals. Randgold’s average grade of 3.7 grams per ton over the last three years is much higher than Barrick’s average of 1.55 and the average of 1.12 grams per ton for the top five producers. This would translate into higher production at a lower cost. Also, Randgold’s disciplined management of inventory, stockpiles, and logistics has helped it to have 52 days of inventory outstanding, much lower than Barrick’s 132 days and Senior Gold Peers’ 78 days. These factors would help the combined entity in better cost management and higher cash flow generation. Total cost is expected to be around $6,673 million and $6,670 in 2019 and 2020, respectively. Consequently, EBIT margin would be higher for the next two years.

Conclusion: Our analysis, valuation, and forecasts above suggests that higher grades, lower mining costs, better working capital management, and an efficient supply chain logistics framework will help in achieving synergies for New Barrick Company, which could reflect in the EBIT margin rising to 25% in 2019 and to 30% in 2020.


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