Barrick Gold Corp.’s (TSX:ABX) Massive US$6.5 Billion Bet: A Blunder or a Wise Move?

Barrick Gold Corp.’s (TSX:ABX)(NYSE:ABX) move to acquire Randgold Resources Ltd. (NASDAQ:GOLD) comes with risks, but there’s one key area where Barrick gains.

| More on:

In one of the biggest developments in the gold industry in recent memory, gold mining giant Barrick Gold Corp. (TSX:ABX)(NYSE:ABX) will acquire Randgold Resources Ltd. (NASDAQ:GOLD) by Q1 2019 to create a new company (henceforth referred to as “the new Barrick”) that’ll be listed on the New York Stock Exchange and the Toronto Stock Exchange.

Barrick Gold’s move comes at a time when gold prices are under tremendous pressure and miners across the board are striving to cut costs and boost productivity. Does the megamerger therefore bring good news for shareholders or will it prove costly for Barrick Gold?

What the new Barrick will look like

The merger will create a new Barrick with a market capitalization of nearly US$19.9 billion based on the market caps as of this writing. Barrick shareholders will own one-third, while Randgold the remaining in the new company.

It’s therefore effectively an all-stock acquisition for Barrick Gold worth around US$6.5 billion as Randgold shareholders will get 6.128 shares in new Barrick for each share held.

New Barrick will be the world’s largest publicly-traded gold mining company. Here are key statistics you must know in order to gauge the new company’s size and scale. New Barrick will own several of the world’s top tier 1 gold mines, primarily Goldstrike, Kibali, Loulo-Gounkoto, Pueblo Viejo, and Cortez. Tier 1 mining assets are typically large and low cost with a long lifespan.

New Barrick’s gold reserves will be around 78 million ounces. For perspective, closest rival Goldcorp (TSX:G)(NYSE:GG) has gold reserves worth 54 million ounces. Additionally, the combined 2017 revenue for Randgold and Barrick Gold stood at US$9.7 billion– the highest in the industry.

Finally, the combined total cash costs for the two companies last year was US$ 538 per ounce of gold, which is also among the lowest in the industry.

In short, a huge gold mining company is taking shape. But there’s more to it than meets the eye.

The risks for Barrick Gold

The deal not only adds to Barrick Gold’s depleting reserves, but also expands its geographic footprint into Africa. Now, geographical diversity is a huge competitive advantage to have in the mining business to mitigate geopolitical risks, but Africa isn’t really among the safest mining zones, so to speak.

In fact, at least three of Randgold’s mines have been hit by workers’ strikes and unrest in recent months. In addition, a new mining code in the Democratic Republic of Congo could mean higher taxes and royalties for Randgold.

Nonetheless, Barrick Gold could get a shot in the arm with this acquisition. You just have to see one chart to understand what I mean. Note that the chart reflects numbers in US dollars for consistency.

GOLD Cash from Operations (TTM) Chart

GOLD Cash from Operations (TTM) data by YCharts

Why the deal could be net positive for Barrick Gold shareholders

As is evident, Randgold is much more sound financially than Barrick Gold given its solid cash flows and low debt level. You might also be surprised to know that Randgold’s returns on invested capital averaged nearly 8% in the past five years compared with Barrick Gold’s negative returns.

Barrick Gold therefore gets a cash injection from Randgold without the additional debt burden. It’s a win-win for any mining company.

Meanwhile, I wouldn’t be surprised to see new Barrick offload non-core, smaller gold assets over time to focus on Tier 1 assets. Also, there’s a fair chance that the new Barrick will able to offer stable, even growing dividends as it monetizes its portfolio.

All told, this looks like the beginning of a new chapter for Barrick Gold — one that should ring in improved returns for shareholders who’ve waited long to see the mining giant get back on the growth track.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Neha Chamaria has no position in any of the stocks mentioned.

More on Metals and Mining Stocks

Metals and Mining Stocks

Better Metals Buy: Gold Stocks vs. Lithium Stocks

Gold is the evergreen choice as a hedge against inflation and weak markets. In contrast, battery metals may offer unique…

Read more »

tsx today
Metals and Mining Stocks

TSX Today: What to Watch for in Stocks on Wednesday, March 22

The Federal Reserve’s interest rate decision and economic projections are likely to keep the TSX highly volatile today.

Read more »

gold stocks gold mining
Metals and Mining Stocks

Gold Stocks Are Gaining Steam: Are They a Buy at Current Prices?

Gold stocks will likely steal the limelight this year, making up for their last year's underperformance.

Read more »

edit Sale sign, value, discount
Energy Stocks

2 Cheap Canadian Stocks You Can Buy for Less Than $50

You can buy Suncor Energy stock, and this gold stock at cheap valuations today

Read more »

A golden egg in a nest
Bank Stocks

How to Protect Your Retirement Portfolio From a Banking Crisis

The US banking crisis has created a market sell-off. Know how safe your money is and protect your retirement portfolio…

Read more »

Initial Public Offering (IPO) concept image, businessman selecting stock trading interface
Metals and Mining Stocks

Lithium Royalty IPO: Is it the Best Way to Invest in Lithium?

Lithium Royal stock went public on the TSX after it raised $150 million via an IPO. Is LIRC stock a…

Read more »

gold stocks gold mining
Tech Stocks

These Stocks Are Half-Priced, But Are They Actually Worth Buying?

Two top growth stocks have fallen by 50% in the last 12 months, and only one of them is worth…

Read more »

tsx today
Metals and Mining Stocks

TSX Today: What to Watch for in Stocks on Thursday, March 2

Macroeconomic concerns and more corporate earnings could continue to keep TSX stocks volatile today.

Read more »