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Sep 24, 2018

Barrick and Randgold raise hopes merger to spark sluggish sector

Barrick buys rival Randgold in all-stock deal

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The biggest gold deal of the past three years may ease concerns about Barrick Gold Corp.’s stagnant production and offer Randgold Resources Ltd. a reset for its languishing shares. The question is whether the whole will really be greater than the sum of its parts.

Canada’s Barrick agreed on Monday to buy London-listed Randgold for about US$5.4 billion, creating a global gold mining behemoth with a focus on Africa and the Americas. The shares of both companies climbed.

“Both sides are each hoping that the other will be the solution to their own problems,” Kieron Hodgson, natural resources analyst at Panmure Gordon, said by phone from London. “Shareholders have become increasingly agitated with the performance of both companies.”

Under Executive Chairman John Thornton, Barrick has been selling assets and stakes in mines to reduce costs and debt. While that effort was initially received well by investors, the move also has raised concern about the company’s production pipeline, helping send its shares falling by about a half from a February 2017 peak. For Randgold, the transaction offers a reset for its shares, which have slipped this year after previously outperforming its gold-mining peers.

Under the all-share deal, Barrick shareholders will own about two-thirds of the new entity and Randgold investors the remainder, the companies said on Monday. There is almost no premium for Randgold shareholders, but Barrick has agreed to a break fee of US$300 million. Both sets of investors are expected to vote on the deal around Nov. 5.

“Randgold has a proven ability to operate successfully in some of the most challenging environments in the world,” Barrick’s Thornton said on a conference call. “The combined company will have five of the world’s top 10 tier-one gold assets.”

Thornton last month outlined Barrick’s plan to add more top-quality mines and to gradually shed anything of a lower caliber or that’s not deemed to be “strategic.” The combined company would have the lowest cash cost position among its peers, Barrick said.

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    Barrick’s gold production fell to 5.3 million ounces in 2017, from more than 8 million ounces a decade earlier, according to data compiled by Bloomberg. The company shed non-core assets outright, or sold stakes to partners, to repair its balance sheet, after its debt peaked at US$15.8 billion in 2013.

    Thornton will retain his position in the enlarged company, while Randgold Chief Executive Officer Mark Bristow becomes president and CEO. Randgold Chief Financial Officer Graham Shuttleworth will become CFO of the new company.

    Executives from both Barrick and Randgold, which produces about 1.3 million ounces of gold a year, are in Colorado Springs for the industry’s annual Denver Gold Forum.

    Barrick will benefit from lower costs and having Bristow as a top executive, Jefferies analysts said Monday in a note.

    “While direct operational synergies are unlikely to be significant and increased Africa exposure is a clear risk, the addition of Mark Bristow as president and CEO is a positive,” Alan Spence and Christopher LaFemina wrote. “All things considered, this transformational deal should be good for Barrick shareholders over the medium/long-term.”

    Barrick rose as much as 6.9 per cent in New York, the most intraday since March 2017, and was trading up 5.5 per cent at US$11.05 as of 12:19 p.m.

    Randgold shareholders will receive a dividend of US$2 a share for the 2018 financial year. The company’s shares climbed 6 per cent to close at 5,220 pence in London, the biggest gain since June 2016.

    Randgold has still slipped about 30 per cent this year as it faced labor challenges in the Ivory Coast, a tax dispute in Mali and the prospect of a tougher mining code in the Democratic Republic of Congo. Barrick’s majority-owned Acacia Mining Plc has been stuck in limbo after Tanzania imposed a ban on exports of mineral concentrates in 2017 and slapped a US$190 billion tax bill on the London-listed company.

    “There are synergies, very clear synergies in Africa particularly because we can operate the entire portfolio that will be double in size with exactly the same structures,” Bristow said on a conference call. “And as we progress collectively to find a solution that really delivers better value and more transparency in Tanzania, we will unlock many synergies.”

    In many ways, the strategies of the two companies are similar. Both firms are highly focused on production costs, aiming to build portfolios that generate free cash flow even if gold prices drop to as low as US$1,000 an ounce. The metal traded at US$1,203.94 at 10:51 a.m in New York.

    Barrick was advised by Morgan Stanley and M. Klein and Co., while Randgold was advised by CIBC World Markets and Barclays Plc.

    The Terms:

    Each Randgold shareholder will receive 6.128 new Barrick shares for each Randgold share Exchange ratio has been agreed based on the volume-weighted average prices of Barrick shares traded on NYSE, and Randgold ADSs traded on NASDAQ over the 20 trading days ended on Sept. 21 Barrick shareholders will receive a total 2018 annualized dividend of up to 14 cents a share.