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Morningstar | Barrick Improves Outlook While Avoiding Hefty Price Tag by Acquiring Randgold With No Premium

On Sept. 24, Barrick Gold announced the acquisition of Randgold Resources in one of the most unique transactions in gold mining. The offer is all equity, with each Randgold share entitled to 6.128 new Barrick shares. The exchange rate is based purely on recent trading history and contains no premium for Randgold shareholders. Pro forma ownership in the combined company will see current Barrick shareholders owning roughly 66% of the company and current Randgold shareholders owning 33%--a split that reflects their unaffected market capitalizations.

Although we don’t include Randgold in our current gold miner coverage, we don’t think the acquisition will affect our fair value estimate by a significant amount after we update our model. Randgold currently trades at about 9 times 2019 EBITDA estimates, in line with other higher-quality gold miners such as Agnico Eagle. Furthermore, Randgold’s share price has fallen more than 35% year to date, in line with the broader gold sector amid weakening gold prices. We don’t anticipate a change to Barrick’s no-moat rating at this time.

In an industry that has a history filled with expensive acquisitions, resulting high leverage, and deals that fail to deliver any value to shareholders, Barrick’s proposed acquisition of Randgold stands apart. By paying no premium, Barrick minimizes the risk that it overpaid or destroyed shareholder value. In addition, because the deal contains no cash component, Barrick will have to raise no new debt to complete the deal, saving it from pressuring its balance sheet as it had in past acquisitions like Equinox Minerals.

We like the addition of Randgold for a few reasons. First, current Randgold CEO Mark Bristow will become president and CEO of the combined company, with Barrick executive chairman John Thornton remaining in his current role. Bristow has a long record as a successful operator, especially in the challenging African geopolitical environment. Although the transaction exposes Barrick to some challenging areas that it had previously shifted away from, we think Bristow is one of the most qualified to guide the company.

Second, Barrick will add Randgold’s two best mines, Loulo-Gounkoto and Kibali, to its portfolio of large, low-cost mines. The combined company will have five mines that produce more than 500,000 gold ounces, have mine lives longer than 10 years, and operate cash costs under $700 per ounce. Brownfield projects at these mines offer additional upside from current production as well.

Lastly, the unique transaction structure that Barrick and Randgold have agreed upon minimizes the risk that we tend to see from megamergers in the gold mining sector. By avoiding a hefty premium, Barrick’s risk of overpaying for assets that won’t deliver is minimized. By relying on an all-equity transaction, Barrick avoids having to raise debt or pressure its balance sheet. Although no merger is without risk, we think the opportunity outweighs the costs in this structure.