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Randgold Resources - Merger agreed with Canada's Barrick Gold

Nicholas Hyett | 24 September 2018 | A A A
Randgold Resources - Merger agreed with Canada's Barrick Gold

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The Randgold board has agreed an all share merger with Canadian gold miner Barrick Gold, in a deal that would create the world's largest gold miner.

Randgold shareholders will receive 6.128 new Barrick shares for each Randgold share. The ratio of Barrick shares to Randgold shares was determined by the average prices of each company's shares over the last 20 trading days. Randgold shareholders will also be entitled to a final dividend of $2 per share prior to the merger.

Following the deal Randgold shareholders will own 33.4% of the combined group, which will be listed in Toronto and New York.

Randgold shares rose 4% in early trading.

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Our view

Developing markets, and particularly the African jurisdictions Randgold operates in, can be risky places to do business.

In recent times CEO Mark Bristow has had to contend with strikes in Cote d'Ivoire and regulatory changes in the Democratic Republic of Congo, both key regions for the group. While the headwinds have been navigated reasonably well, they've still knocked the share price.

From Randgold's perspective the Barrick deal is all about de-risking the portfolio. Barrick's portfolio is weighted towards the Americas and has substantial developed market assets in North America.

The merger brings together five of the world's top ten gold mines by cost, so low cost will be a feature of the new Barrick group going forwards. That's an area of particular expertise at Randgold, and the fact Mark Bristow will remain at the helm, with Randgold's CFO also staying on, bodes well for the future.

A solid operating performance means, despite recent share price falls, Randgold was trading on a higher rating than Barrick in the run up to the deal. As a result, Randgold shareholders will be getting more than their fair share of assets from the deal, despite being the junior partner.

Randgold had been offering a pretty generous dividend yield recently, but going forward the dividend will be based on Barrick's payments. While the group plans to grow the payment to shareholders over time, Barrick's starting yield is a modest 1.3%.

That's a reflection of more investment opportunities, and Barrick's currently working on two projects which could eventually deliver tier 1 gold assets. Those projects have the potential to drive meaningful dividend growth in the years to come - although of course that's not guaranteed.

As a deal, the merger might not knock the socks off Randgold investors, and the loss of a London listing will be a blow to some. However, a stake in what will be the world's leading goldminer, with an experienced and successful management team should not be sniffed at.

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Half Year Results - 9 August 2018

Gold production in the second quarter was up 9% quarter-on-quarter at 313,302 ounces, with costs per ounce down as a result. However, profits for the period were 12.2% below Q1 at $58.4m as depreciation increased.

Randgold shares were trading 2.6% lower in early trading.

Total cash cost per ounce was 3% below that reported last quarter at $697, thanks to increased production (although remains well above where it was this time last year). Increased production also meant that total gold sales rose 5% to $411.5m despite a 2.4% fall in the gold price to $1,299/oz.

The flagship Loulo-Gounkoto mining complex saw gold production rise 4% in the quarter to over 150,000 ounces as throughout out increased - grade and recovery remained broadly unchanged.

Among the group's smaller mines: Morila saw production fall 2%, Kibali production rose 17% and Tongon production rose 12%. Kibali was boosted from the ramp-up in underground mining, while Tongon production jumped after industrial action last quarter.

Feasibility studies in the Massawa Central Zone in Senegal continued during the quarter, and the group believes the project could generate healthy returns at current gold prices. Further exploration activity is underway in Mali, Cote D'Ivoire and the Democratic Republic of Congo. Total exploration and corporate costs fell 5.7% in the period to $14.9m.

Net cash generated in the quarter was $95.5m, up 49% quarter-on-quarter but down 28% year-on-year.

Find out more about Randgold shares including how to invest

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.