Gold miners earned the ire of investors including billionaire hedge-fund manager John Paulson for entering into bad deals that destroyed shareholder value in the past.
Shareholders of the two companies announcing a merger Monday signaled they think this time may be different.
Barrick Gold Corp. Executive Chairman John Thornton said his company isn’t paying a premium under its agreement to buy Randgold Resources Ltd. The decision came after the company has been criticized for its “undisciplined growth and poor returns” in the past.
Investors’ patience is being tested as mining companies struggle to strike a balance between protecting shareholder value and adding assets that could boost their output. Judging by the rally in Barrick and Randgold shares Monday, improving production prospects may be enough to keep them happy for now.
The market may see a “wave of consolidation we’ve waited for,” Michael Siperco, an analyst at Macquarie Capital Markets, said in a telephone interview. Barrick’s acquisition may spur more interest in deals, “or at least cause the market to revisit the thesis.”
The combined gold reserves still buried in mines– an indicator of production prospects– shrank by almost half to 11.3 million ounces last year, from its peak in 2012 after companies cut spending on exploration and development of new projects, according to Bloomberg Intelligence data on 15 big producers. That highlights the urgency for mining companies to add projects to boost their production outlook and revive fading investor interest in the sector.
Barrick may also sell “non-core assets,” creating buying opportunities for other companies, Shree Kargutkar, a portfolio manager for Sprott Asset Management, which oversees about $8.9 billion in assets, including gold mining equities, said in a telephone interview Monday.
Randgold Chief Executive Officer Mark Bristow, who will assume the same role in the combined company when the deal with Barrick closes, said there are Australian investors interested in Barrick’s stake in the Kalgoorlie mine.
The latest deal is also reviving speculation Barrick may return to the negotiating table with Newmont Mining Corp. for a new tie-up after talks between the two collapsed in 2014 over differences on issues including the leadership of the combined company.
“It’s a topic for conversation – whether the Barrick/Newmont tie-up is finally dead or just deferred,” Siperco said. “That could change” and “you could see alternative offers emerge for Randgold.”
Before the deal broke down, Barrick and Greenwood Village, Colorado-based Newmont identified annual savings of $1 billion, mostly from combining their Nevada assets, two people with knowledge of the matter said April 2014.
“The commitment in this industry to focus on value rather than control is unsurpassed,” Bristow said in a call with analysts Monday, when asked about Barrick’s Nevada assets. “You know there has been many attempts to unlock value and as you know me, I’m agnostic about who owns it.”