All is not glittering in the gold-mining industry
Barrick Gold and Randgold join to form a mega-miner
“THE gold sector is like a charade,” Mark Bristow proclaimed in 2016, deriding miners for having too much debt and too little discipline. Mr Bristow is nonetheless poised to become the industry’s most powerful man. On September 24th Barrick Gold, a giant miner, said it would pay $6bn for Randgold Resources, the firm Mr Bristow founded. If shareholders approve the deal, it would be the world’s biggest gold-mining company. Mr Bristow’s task, as chief executive of the combined entity, is to restore its gleam.
The industry as a whole is looking a bit grubby. As gold prices rose in the 2000s, many firms went on a spree, snapping up mediocre mines. When prices fell, they were left with debt and inferior projects. This year share prices for big miners have been stuck in the dirt even as the broader stockmarket has soared.
Barrick has struggled, too. Founded in Canada in 1983, it took on more debt as it mined for gold on five continents. John Thornton, its chairman, has in recent years worked to sell mines and strengthen the company’s balance-sheet. But Barrick still had $5.8bn in debt in July and a BBB credit rating from S&P, a ratings agency. It faces declining production, because reserves are being depleted and some far-flung investments are proving problematic. Work has halted on a large mine in the Andes, for example, in the face of opposition from environmentalists. Production has plunged in Tanzania, as the government demands a greater share of riches from mines in which Barrick has a majority stake.
Enter Mr Bristow, a geologist who likes to traverse Africa by motorbike. Investors widely admire Randgold. It is choosy about its mines, investing only in places with particularly rich deposits, and disciplined about costs, regardless of whether gold prices are high or low. Management is localised in the countries where Randgold operates—Mali, Ivory Coast and the Democratic Republic of Congo (DRC). This has helped it succeed in an industry dogged by volatile prices and volatile governments, or “complex jurisdictions”, as the company calls them.
Barrick’s Mr Thornton, who will remain chairman, hopes Mr Bristow can apply his operational expertise to a global miner. For instance, Randgold excels at underground mining, which will be more important for Barrick but has not been its speciality to date—Barrick has mostly unearthed gold in vast open pits. Randgold also brings hard assets. The combined group would be a mega-miner, with five of the world’s ten biggest mines. Randgold’s cash flow would help service Barrick’s debt and support investments in America and the Dominican Republic.
Notwithstanding such benefits, shareholders may still oppose the deal. Barrick’s investors may balk at risks in Africa—the DRC, for instance, is changing its laws in order to take higher royalties from mining companies. Randgold’s investors may resent that Barrick is paying no premium for Randgold’s shares.
If the companies do combine, Mr Bristow must manage a much larger, more complex business than he has to date. He will have to show that the expertise he displayed in Africa is useful in developing Barrick’s mines in, say, Nevada. Time to test his Midas touch.