Barrick Gold Corp. (ABX, Financial) and Randgold Resources Ltd. (GOLD, Financial) have inked an agreement for a stock-for-stock merger. The announcement was released by both companies on Monday.
The deal will create a giant in the gold mining industry with a market capitalization of approximately $19.2 billion according to the share price of both stocks at close Monday. Following the announcement, Barrick Gold Corp. soared 5.44% to $11.04 per share on the New York Stock Exchange and Randgold Resources Ltd. jumped 6.62% to $68.14 per share on the Nasdaq.
Under the terms of the deal, all the shares of Randgold Resources Ltd. will be converted with newly issued shares of Barrick Gold Corp. at a ratio of one share of Randgold Resources to 6.128 new shares of Barrick Gold Corp.
Therefore the shareholders of Barrick Gold Corp. will own approximately two-thirds of the combined company and the shareholders of Randgold Resources Ltd. will hold the remaining one-third.
The gold producer giant will hold prime assets in the Americas, in Africa, Saudi Arabia and in Oceania.
The giant will supply the market with 5.8 million to 6.4 million ounces of gold every year, surpassing Newmont Mining Corp.’s (NEM, Financial) annual attributable production of 4.9 million to 5.4 million ounces. The cost to produce one ounce of gold will stay one of the lowest in the industry.
The combined company will drain the metal from total proven and probable gold reserves of about 85.4 million ounces, a volume that cannot be replicated by any other mining company on the entire globe.
The average grade of the total reserves should improve following the merger. The average grade of Barrick Gold Corp.’s total proven and probable reserves is 1.55 grams of gold per ton of ore, while the average grade of Randgold Resources Ltd. stands at 3.8 grams of gold per ton of mineral. This information will be crucial to the economics of the forming company because the higher the concentration of precious metal in one ton of mineralized rock the lower the all-in sustaining cost to place the product on the market.
The potential deal will depend on the approval of both Barrick Gold Corp. and Randgold Resources Ltd. shareholders.
It is difficult to estimate the value of the combined business. That will not be a mere arithmetical sum of two companies, but a result from a synergy. As a pure indication, Barrick Gold Corp. will combine a total revenue of $8.4 billion and operating cash flow of $2 billion with Randgold Resources Ltd.’s total revenue of $1.3 billion and operating cash flow of $550 million.
Figures are as declared by the two companies for full fiscal 2017 and when gold averaged $1,257.12 per troy ounce on the London bullion market.
There is another piece of information that is very important to the existing shareholders of Barrick Gold Corp. The merger is going to combine a trailing 12-month Ebitda margin of nearly 30% for operations of Barrick Gold Corp. with a 36% margin for operations of Randgold Resources Ltd. This means that the overall profitability of combined operations will likely beat that of most of the direct peers and will get closer to Newmont Mining Corp.’s Ebitda margin of 35.5%.
Critically, Barrick Gold Corp. is also a producer of copper. The combined company will also continue deriving about 12-13% of its total revenue and net income from the sale of copper.
The deal should drive value accretion for the shareholders of Barrick Gold Corp. who yesterday received the announcement of a $300 million cross-shareholding agreement with Shandong Gold Group Co. Ltd.
The agreement is intended to bolster the partnership with the Chinese global mine operator. The cooperation between the two companies started in 2017. Shandong Gold Group, which specializes in exploiting untapped underground mineral resources, is helping Barrick Gold Corp. make the Pascua-Lama mineral project feasible, not only from a technical but also from an economic standpoint. The companies are jointly working to mitigate the risks associated with the development of the project. Pascua-Lama will be another value accretive factor to shareholders of the combined company because the property hosts about 21.3 million ounces of measured and indicated gold resources. That equals about 24% of Barrick Gold Corp.’s total measured and indicated mineral resources.
Shandong Gold Group will also help Barrick Gold Corp. make use of mineral resources that are on the El Indio Belt in Chile. There Barrick Gold Corp. is advancing the Alturas project, a greenfield discovery with approximately 6.8 million ounces of gold contained in inferred mineral resources.
In exchange for his contribution, Shandong Gold Group received a 50% interest stake in Minera Argentina Gold SRL, the owner and operator of the Veladero Mine in Argentina. The Veladero mine is one of the main producing assets of Barrick Gold Corp. with an annual output of 275,000 to 330,000 ounces at an all-in sustaining cost of $987 per ounce of metal sold. The output is about 6.4% of the total production of gold forecasted for full fiscal 2018.
Following the announcement, Barrick Gold Corp. crossed the 50-day simple moving average line, though the share price is still below the 200- and 100-SMA lines.
The share price at close Sept. 24 is nearly 16% off the 52-week low of $9.53 and 52.5% from the 52-week high of $16.84.
The price-book ratio is 1.35 versus an industry median of 1.74 and the EV-to-Ebitda ratio is 8.6 versus an industry median of 9.3.
Disclosure: I have no positions in any security mentioned in this article.
