September was a month full of wonderful news for the gold industry. It hasn’t been particularly easy for gold miners to keep extracting gold. There have been a number of mine closures across the globe and a general decrease in production. The news that Barrick Gold one of the largest gold miners in the world would be merging with the African-based gold mining company Randgold brought fresh hope to the gold mining industry.
The Barrick-Randgold merger is estimated to be worth $6.5 billion. This deal will result in the formation of a new company called New Barrick which will be listed on the New York and Toronto based exchanges. According to the terms of the new merger, shareholders will receive 6.1280 shares estimated to be worth $11. The majority of the shareholding will be under Barrick gold, Randgold shareholders will only be given 33.4%of New Barrick. In addition to that, Randgold shareholders will each get an annual dividend of $2 per shade for the year. These shareholders will also receive $0.14 per share.
New Barrick will have a total of 78 million ounces of gold reserves and ownership of five of the World’s best Tier One gold mines. These are mine’s whose life is extends beyond 10 years and production levels of 500,000 ounces of gold annually.
Two of Randgold’s Tier One gold mines Loulo-GounKoto and Kigali will be transferred to the New Barrick company. Barrick Gold will add three of its tier-one assets -Pueblo Viejo, Cortex mine and Goldstrike to the new company. These mines are known as high quality mines. These high quality mines offer a cash cost of about $537 per ounce, which happens to be the lowest in the industry. This low cost structure will enable the new mining company to maintain a low gross debt ratio. Apart from gold, Barrick also has copper mines that produced 513 million pounds worth of copper in 2017. These mines will also complement the new company’s returns in the long run. In addition to better returns the company will leverage the technology, innovation and experience from both companies to create what could end up being a mammoth gold mining company in the world
Let’s look at these two companies separately to see how each one will benefit from the deal.
Randgold has always been touted as one of the FTSE success stories in the 21st century. Since 1999, this company has delivered incredible returns for its investors and shareholders to the tune of about 4,000%. In 1999, Randgold’s stock was 150p but by 2016, it had risen to 10,000p. However, things have not been working out so well for the company in the last two years. 2018 has been a particularly bad year. The share price slid by 35%. Barrick on the other hand has not been doing good in the industry for a long time. It did not ride the 2000 gold bull market as well as Randgold because of some ill-advised hedging policies that capped the share price during that period. When gold rose from $250 an ounce to $1,920 Barrick’s stock did not appreciate as expected. While gold went up eightfold, the company itself only went up five times. At the beginning of September, before the news of a possible merger made its way through the grapevine, Barrick shares were worth $9.50 which happens to be lower than what they were in 2000.
Barrick has been working hard to improve its operations and under John Thornton, it managed to reduce its debt by almost 50%, sold off redundant assets, improved its credit status and its earnings. Still, judging by the spectacular drop in share price, investors weren’t exactly queuing up to get a piece of the company.
Randgold also had its share of problems. The biggest issue to company has had is its dwindling reserves. Where Randgold is weak, Barrick shines. It has more assets around the world. It also has a larger exploration budget and revenue than Randgold. Randgold has a number of lucrative mines in countries like the Democratic Republic of Congo however, the idea of nationalisation of natural resources in African countries like the DRC and Mali is a threat lurking about in the mining world. The Barrick-Randgold merger is still subject to approval by shareholders and regulatory bodies.
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