September 24, 2018 / 4:53 AM / 3 months ago

Breakingviews - Barrick and Randgold wisely explore M&A riches

Gold and silver bars are pictured at the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna August 26, 2011. Gold prices rose on Friday in choppy trade ahead of a speech by U.S. Federal Reserve Chairman Ben Bernanke in Jackson Hole, Wyoming, which will be closely watched for hints on the outlook for monetary policy.REUTERS/Lisi Niesner

SINGAPORE (Reuters Breakingviews) - Barrick Gold and Randgold are wisely prospecting for M&A riches. The $12 billion Canadian miner led by former Goldman Sachs banker John Thornton is set to unite with its smaller, Africa-focused rival. A deal this big would shake up a sector long cowed by past mistakes.

    Gold diggers came under fire from investors for being poor stewards of capital. Former BlackRock fund manager Catherine Raw used to be one of them before becoming Barrick’s chief financial officer in 2015. Paulson & Co estimated last year that industry impairments since 2010 totalled $85 billion.

    Such criticism forced greater emphasis on costs and dampened enthusiasm for acquisitions. Barrick, for one, has sold less essential assets and set its sights on cash, not empire building.

    Gold-miner stock prices continue to underperform bullion, but a mega-merger would signal the possible end of a contrition era. Blame weakened valuations – both Barrick and Randgold have lost about a third of their market capitalisations over the past year – and pressure even on heavyweights to replenish reserves of the precious metal. Barrick reported annual gold production of 5.3 million ounces in 2017, but expects it to fall to as little as 4.2 million between 2019 and 2022.

    The terms of any transaction with Randgold will determine the financial logic, but there is strategic sense. Both are cutting expenses and have high hurdle rates for new investment. Barrick’s mines in more stable places like the United States and Australia would balance out Randgold’s riskier portfolio.

    All about a gold merger does not necessarily glitter, though. Randgold boss Mark Bristow will need to unpick the impact of a new mining code on operations in the Democratic Republic of Congo and the fallout of labour unrest in Ivory Coast. Meanwhile, Barrick-controlled Acacia Mining is struggling to resume exports from Tanzania. Bigger has not always been better either, as Barrick knows full well from its $8 billion Equinox Minerals deal in 2011.

    This latest mooted union is nevertheless intriguing. It could create a giant able to remain cashflow positive even if the metal trades as low as $1,000 an ounce. That might force others to start panning for merger nuggets.

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