Barrick Gold Corp. (ABX, Financial) closed up 0.30% to $13.21 per share traded on the New York Stock Exchange on Monday following the release of shareholder voting results on its merger with Randgold Resources Ltd. (GOLD, Financial). Randgold Resources Ltd. was also up 0.34% to $82.60 per share on the Nasdaq.
The extraordinary meeting of Barrick Gold Corp.’s shareholders has almost unanimously approved the merger with Randgold Resources Ltd.
The number of votes for the merger was 683,038,422 or 99.8% of the total, while the number of withheld votes was 1,169,225 or 0.2% of the total.
Conditional to the approval from the shareholders’ meeting of Randgold shareholders, from the Royal Court of Jersey, and to other customary conditions for the closing, the merger should complete on Jan. 1, 2019.
The Executive Chairman John L. Thornton said in a statement, “The combination of Barrick and Randgold will create the compelling gold investment.”
The stock-for-stock merger agreement with Randgold Resources was reached at the end of last summer and envisages that Barrick Gold Corp.’s newly issued shares will convert Randgold Resources Ltd.’s all ordinary shares. To that end, Barrick Gold Corp. will issue 6.128 new ordinary shares for each share of Randgold Resources.
The common stock of the resulting combined company will be held by the shareholders of Barrick Gold Corp. for approximately two-thirds and by the shareholders of Randgold Resources Ltd. for about one-third.
The first thing investors thought of when the two companies disclosed the agreement on Sept. 24, 2018, was that the gold mining giant would be able to surpass Newmont Mining Corp. (NEM, Financial) in annual gold production. The U.S.'s largest producer of gold in the world is going to supply 4.9 million to 5.2 million ounces of attributable gold in full-year 2018.
This means that the combined company is thought to be able to produce around 5.8 million to 6.4 million ounces of gold annually also in consideration of the current production capacity of Barrick Gold Corp. and Randgold Resources Ltd. In reality, the new mining company will produce a lower annual volume of gold but at a decreased production cost per ounce because, following the deal, the strategy is to become a tier-one mine operator through the disposal of some of the costlier and higher-risk assets of both companies.
With its third-quarter financial report for 2018, Barrick Gold Corp. has already indicated what assets will compose the portfolio of the combined corporation.
The assets base will likely be formed with the Cortez and Goldstrike assets in Nevada, the Kibali mine in the Democratic Republic of Congo, the Loulo-Gounkoto mine in Mali, the Pueblo Viejo mine in the Dominican Republic and the Goldrush and Turquoise Ridge mines in Nevada.
Furthermore, concerning the Cortez and Goldstrike assets, Reuters reported on Monday that Barrick Gold Corp. and Newmont Mining Corp. are in talks for a joint venture in Nevada gold mining operations.
Investors should not be surprised if mergers and joint ventures between operators in the gold mining industry increase. With the running out of mineral resources at open-pit or surface, companies nowadays have the necessity to find solutions to continue their business at a lower cost or at least at a more contained production cost. The deeper the mineral deposit becomes, the higher is the cost to produce one ounce of gold.
Many gold producers like Barrick Gold Corp. are also gradually introducing a sophisticated technology at mining for identifying the smallest vein of gold at the deepest level in the underground with the highest possible precision. That will also give a boost to the target.
However, a transformation of the industry will mainly be achieved through mergers and acquisitions and the creation of joint ventures and partnership agreements with other companies that have greater know-how and specialization in exploiting untapped underground resources.
When in search of synergies through joint ventures and mergers, gold producers also need to consider that the quality of available mineral resources must be preserved during operations. A lower ore grade negatively impacts costs and cash flows and increases the exposure of the business of mining companies to the volatility of precious metal commodities markets. Therefore, the company will have less flexibility when allocating the financial resources.
The market capitalization of the resulting combined company will be worth approximately $23 billion.
Barrick Gold Corp. decreased 6% for a market capitalization of $15.37 billion for the 52 weeks through Nov. 5. Over the same period the market capitalization of Randgold Resources Ltd. decreased 9% to $7.8 billion.
Source: GuruFocus.com
Barrick Gold Corp. has a price-book ratio of 1.75, an EV-Ebitda ratio of 13.18 and a trailing 12-month Ebitda margin of 21.8%.
Randgold Resources Ltd. has a price-book ratio of 2.17, an EV-Ebitda ratio of 20.72 and a trailing 12-month Ebitda margin of 31.6%.
Disclosure: I have no positions in any securities mentioned.
