What does the Barrick Gold-Randgold merger mean for gold mining stocks?

Fears that ‘peak gold’ is on the horizon are growing, and depleting reserves and resources only fuel the fire. Most of the 192,000 or so tonnes of gold that have been mined throughout history were extracted after 1950 and, depending on what estimates you read, there is only thought to be about 57,000 tonnes of gold left in reserves around the world. Considering worldwide gold output is at its peak, at around 3200 tonnes per year, there is good reason to worry. But it is important to remember that reserves and resources are just classifications that are largely based on economic viability and not the actual amount of gold left in the ground: higher prices make costlier extraction economical and vice versa. Plus, gold is not consumed and is virtually indestructible, meaning all the gold that has ever been produced is still in circulation today. Recycling also contributes considerable amounts to new supply each year.

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According to S&P Global, gold was the commodity most explored for in 2016, attracting almost half of the global exploration budget, but spending was still at its lowest level for ten years in value terms at $3.3 billion (showing it is not only gold miners that have lost their appetite for exploration) before rebounding last year to $4.1 billion. Still, the lengthy time it takes to progress new projects and prove-up reserves means purchasing them is the only quick fix available to bolster future feedstock, when new discoveries are hard to come by and increasingly costly to mine as the industry has to dig ever deeper in search of new gold bearing ore. This has left exploration to small and junior miners, which are launching smaller projects that can be bought by the majors should it grow into a formidable operation. The theory that exploration has shifted to smaller projects is enforced by the fact that the volume of gold financings has risen over the past two years but the value has dropped.

For companies like Randgold and Barrick Gold, purchasing reserves and resources has become a cheaper option than digging for new ones. Therefore, both companies are aiming to combine their financial firepower to find new reserves and resources.

Randgold boasts superior grades over rivals

Overall, gold grades have dropped by nearly 90% to just one gram per tonne from about ten grams back in the 1960s, according to Bloomberg, further demonstrating the increased scarcity of gold left in the ground and why it is becoming more expensive to extract it - miners are literally digging for just one of a million grams of the material unearthed.

Barrick Gold’s average grade had lingered slightly above the industry average until last year when it ticked up to 1.55 grams from 1.34, partly thanks to the ongoing rationalisation of its portfolio that has seen lower quality projects offloaded to make its higher-grade flagship operations more prominent in the weightings. That is considerably higher than the 1.12 grams per tonne average from the top five producers (including Barrick) – Newmont Mining, AngloGold Ashanti Holdings, Goldcorp, and Newcrest Mining.

Randgold on the other hand, has lauded market-leading grades that have held steady over the last 15 years. While Barrick and other larger players have battled to maintain over the one gram threshold, Randgold has averaged over 3.7 grams over the last three years.

Barrick is contributing the highest volumes to the new enlarged business, but Randgold is providing the grades. For example, the largest mine in the portfolio, Barrick’s Cortez mine in Nevada, has a grade of 1.87 grams compared to Randgold’s smaller mines such as Loulo at 4.5, Gountoku at 4.6 and Kibali at 4.1. Although, Barrick’s Turquoise Ridge (also in Nevada) carries a grade of 15.53 grams and is already the fifth largest project in the portfolio and one with the greatest growth potential.

Barrick Gold’s annual production continues to dwarf that of its takeover target, but has declined 25% over the past five years to 5.3 million ounces, while Randgold’s output has increased 46% to 1.3 million ounces. The cash cost of extracting gold has been cut at both companies. The higher grades mean Randgold has better opportunity to grow production while mining at a lower cost.

The merger and the savings it aims to create will see New Barrick Group extract an ounce of gold for around $538 - the lowest in the industry, and one that will produce the highest adjusted earnings before interest, tax, depreciation and amortisation level (EBITDA) margin.

Cash-rich Randgold to help strengthen balance sheet

Barrick has made reducing debt a priority over recent years but it still needs to bring it down. It has offloaded a huge amount of assets over recent years to help streamline its portfolio and raise the funds it owes to lenders. This has, however, come at the cost of its dividend and strained cash flow over the past three years.

Randgold has not only avoided debt but racked up a serious amount of cash, with cash flow more than quadrupling in the last four years to allow the dividend to experience a similar increase.

Randgold will be expected to play an outsized role within New Barrick Group. The firm is expected to deliver around half of New Barrick Group’s $1 billion of annual cash flow. With debt to tackle and costly developments in Nevada, Barrick Gold hopes Randgold can help generate the vast amounts of cash it needs. New Barrick Group’s net debt position on completion of the merger is anticipated to be around $3.7 billion, and the firm has already said the takeover of the London-listed firm offers ‘significant re-rating potential’ and a chance to secure lower interest rates.

Barrick Gold-Randgold merger to diversify business

Bringing the best projects of both companies will mean New Barrick Group will have the largest concentration of tier one gold assets, with five of the top ten in the world. Tier one projects are capable of producing over 500,000 ounces per year for at least a decade. These are:

• Cortez and Goldstrike mines in Nevada, US: currently sit at the heart of Barrick Gold’s business, accounting for 43% of overall production with an output of 2.3 million ounces in 2017. Cortez will be the largest mine in the portfolio while Goldstrike, for a tier one project, boasts an impressive grade of over ten grams per tonne. Output this year will be between 2-2.25 million ounces
• Randgold’s Kibali mine in the Democratic Republic of Congo: Randgold has a 45% stake in the Kibali mine alongside partners including AngloGold Ashanti (45%). The project produced just shy of 600,000 ounces of gold in 2017 and is forecast to hit up to 730,000 ounces in 2018 at a lower cash cost.
• Randgold’s Loulo-Gountoko complex in Mali: currently the largest producer in Randgold’s portfolio with an output of over 730,000 ounces in 2017, although that will fall to around 690,000 ounces this year. The firm holds 80% of the project.
• Pueblo Viejo mine in the Dominican Republic: Barrick Gold holds a 60% stake in the mine alongside 40% partner Goldcorp. It produced 650,000 ounces of gold last year. The mine has a projected lifespan of over 25 years. Output this year is set to fall to 585,000-615,000 ounces.

These projects will form the backbone of New Barrick Group and help generate the cash needed to develop its large upcoming projects, which include:

• Goldrush mine in Nevada: plans to begin production between 2021 and 2022. Has reserves of 1.5 million ounces but, including resources, has potential to produce an average of 500,000 ounces per year for 16 years.
• Turquoise Ridge in Nevada: Barrick Gold owns 75% of the mine alongside partner Newmont. The project has the highest grade in the portfolio and work is underway to more than double existing production from 211,000 ounces in 2017 to over 500,000 ounces per year to turn it into a tier one asset.
• Strategic partnership with Shandong Gold in the El Indio belt: Barrick Gold signed a strategic partnership with the Chinese firm last year, resulting in Shandong purchasing a 50% stake in the Veladero mine in Argentina. Having agreed to seek new opportunities together the pair agreed to mutually invest $300 million into one another, which will still go ahead after the Randgold merger is completed. The El Indio Gold Belt is a mineral-rich region spanning the border between Chile and Argentina where they are hoping to find satellite discoveries to complement Veladero.
• Copper business: copper is a by-product of gold and New Barrick Group will have a 413 million-pound per year business based on 2017. The plan is to grow this segment as a way of diversifying its commodity base. Barrick Gold states most of its copper comes from its Zaldívar joint venture, Jabal Sayid joint venture and its Lumwana mine.

New Barrick Gold to sell assets to focus on tier one mines

Over the course of 2019 New Barrick Group intends to review the remainder of assets, with a view of offloading those that are not tier one assets, or don’t have the potential to become them. The budgets demanded by its upcoming projects means the company can narrow its focus on those with the most potential.

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No assets have yet had a ‘for sale’ sign slapped on them, but BMO Capital Markets has suggested that up to $5 billion worth of projects could be offloaded. Despite ambitions to grow its copper business some believe its existing interests could be sold off. This includes its 50% stake in the Zaldivar mine in Chile which could be sold to partner Antofagasta (who bought the stake from the Canadian firm for over $1 billion in 2015), its 50% share of Jabal Sayid in Saudi Arabia alongside partner Ma’aden, and the Lumwana mine in Zambia. However, New Barrick Group has said it ‘intends to grow the value of its existing portfolio of copper mines and projects, through development of its existing resources, through potential partnerships and joint ventures with third parties and, if market opportunities arise, through acquisitions.’

Other projects that could be offloaded include:

• Golden Sunlight mine in Montana: a small operation that produced 41,000 ounces last year with expected output in 2018 of 35,000 to 50,000 ounces. All in costs are high at over $1300 per ounce and reserves are low at only 30,000 ounces, but it has plenty of mineral resources that could be upgraded.
• Hemlo mine in Ontario: has produced over 21 million ounces of gold in its lifetime with output hitting 196,000 ounces last year and potential to hit up to 220,000 this year. Reserves sit at almost 1.8 million ounces with a similar amount of resources.
• Kalgoorlie in Western Australia: Barrick could look to sell its 50% share in this mine, possibly to equal partner Newmont. The mine produced 368,000 ounces last year with ambitions to hit up to 440,000 ounce this year at a cash cost potentially below $700 per ounce.
• Lagunas Norte in Peru: This open pit mine produced 387,000 ounces last year at the extremely low cash cost of just $483. However, costs are set to soar this year and production will drop to a mid-range estimate of just 250,000 ounces. The mine has four million ounces in reserves with less than one million ounces of resources.
• Porgera mine in Papua New Guinea: this is an equal venture with Chinese firm Zijin Mining Group producing 235,000 ounces of gold last year with output set to rise to up to 255,000 this year. Cash costs are high at close to $1000 per ounce. The project has two million ounces in reserves.
• Tongon mine in Ivory Coast: Randgold owns an 89.7% stake in the mine, which produced 288,680 ounces in 2017 and set to remain broadly flat in 2018 with a focus on lowering cash costs. It has total reserves of 1.2 million ounces.
• Morila mine in Mali: Randgold owns a 40% stake in the small Morila mine. Production was just over 70,000 ounces last year and set to reach 90,000 ounces in 2018. It has reserves of 190,000 ounces.
• Massawa development in Senegal: this non-producing operation is owned 83% by Randgold and currently has 2.7 million ounces of reserves and 3.9 million ounces of resources.

The company has stated it will focus on organic growth, developing its existing tier one assets and best development projects and, while M&A has not been ruled out if the right opportunity presents itself, New Barrick Group plans to switch its inorganic growth strategy through the strong partnerships that Barrick Gold has built with Chinese miners over recent years. This should help lower the burden of investment and exposure to risk.

Who will manage New Barrick Gold after the merger is complete?

The other vital ingredient of Randgold that Barrick Group has sought to tap is the London-listed company’s chief executive officer (CEO) Mark Bristow, a South African who founded Randgold in 1995 and has gone on to earn the highest of reputations in the industry for his track record that has seen him open new mines in stricken and unstable nations in Africa such as the DRC and build a company that others have many reasons to be envy of.

Bristow’s experience and approach is a contrast to John Thornton, the former Goldman Sachs man who has been in charge of Barrick Gold as executive chairman since 2014. Barrick’s CEO and president, Kelvin Dushnisky, resigned in the summer to take on the top job at Anglogold Ashanti and the position has remained open since. Having not stepped into a mine until 2016, Thornton has spent his time focused on the financials, trying to improve the business through cost-cutting and restructuring, and striking formidable partnerships particularly in China.

Thornton will remain as executive chairman of New Barrick Group and Bristow will be CEO. The expectations are clear: Thornton will handle the strategy and Bristow will manage the mines, providing what looks like a perfect match. Randgold’s current chief financial officer, Graham Shuttleworth, will assume the same role at the enlarged business as will Barrick Gold’s head of strategy, Kevin Thomson.

However, many point to the potential struggle that could emerge between these two strong-willed managers. For example, Bristow has implemented strict investment criteria when it comes to exploration, setting the bar high by refusing to contemplate any new developments that don’t offer an internal rate of return of at least 20% at a gold price of just $1000. While some argue this high bar is the difference between Randgold and others who have used debt to fund flops over the past two decades, others say this attitude is why exploration levels have dropped, and it is areas like this where some believe Bristow and Thornton could butt heads.

The merger creates a geographically diversified miner, with core hubs in the US and Africa. While Randgold reduces the risk attached to its portfolio that is largely based in politically uncertain jurisdictions, Barrick Gold not only gains a foothold into mineral-rich Africa but a manager that knows how it operates. That is poignant considering the increasing interest in Africa from the Chinese firms that Thornton has partnered up with over the years, and important for Barrick’s spin-off Acacia Mining.

What does the Barrick Gold-Randgold merger mean for Acacia Mining?

Acacia Mining, the Tanzanian gold miner that Barrick Gold retained a 64% stake in after spinning off the company back in 2010, continues to be left in the dark over its own future, although glimmers of light are emerging for the problem-stricken company.

Acacia Mining has been left in limbo since the introduction of a ban on the export of gold and other concentrates out of Tanzania was introduced in March 2017. It has forced it to mothball its concentrate and copper operations late last year, but not before over 185,000 ounces of gold had built up in its warehouses. That inventory – worth over $250 million – still sits idle in warehouses today at huge cost to the company. The miner has had to scrap its dividend and burnt through two-thirds of its cash in the last 18 months while simultaneously being slapped with a demand for a staggering $190 billion in unpaid taxes, royalties and fines after being accused of operating illegally and understating its exports. And, after a needless miscommunication error turned into a public relations disaster Acacia lost its chairman, chief executive and finance director.

Yet, the worst part is the fact Acacia remains in the dark over its own future: Tanzanian president John Magufuli has refused to negotiate with the company and has instead demanded to deal exclusively with Barrick as the major shareholder, specifically Thornton himself.

Tanzania export ban continues to cripple Acacia Mining: timeline

• March 2017: Magufuli and the Tanzanian government implement a ban on the export of concentrate to stop gold, copper, nickel, silver and other ores from leaving the country to be processed in foreign smelters. This followed other African nations and the likes of Indonesia and the Phillippinnes that have revived resource nationalism. This attempt to keep value-added mineral processing inside the country forced Acacia to stockpile concentrate production from its Bulyanhulu and Buzwagi mines, accounting for one-third of its total sales. The miner began losing $1 million per day in revenue and saw Endeavour Mining pull out of merger talks that had started earlier in the year.
• May 2017: Tanzanian authorities accuse Acacia of exporting concentrate with mineral content ten times higher than what was declared in order to avoid tax and royalties it pays to the government. Acacia denied the claims, stating government figures would mean its two mines were the largest producers in the world and called for an independent review. Barrick warned on its own 2017 full-year guidance with Acacia accounting for 6% of its total output (down from 9.7% when it was spun out).
• June 2017: after being accused of illegally operating in the country, Barrick chairman Thornton flies to meet Magufuli, where the pair agree to start negotiations.
• July 2017: Acacia is told it owes $190 billion in unpaid taxes, royalties and fines. Magufuli continues to ramp-up tensions by threatening to close any mines that refuse to pay the money owed and renegotiate ownership terms after a new mining code was introduced demanding a 50:50 revenue split from the mining industry. Other firms also begin reacting, with the likes of Petra Diamonds temporarily closing its Williamson mine after being accused of under-declaring exports. Acacia, which had seen $1 billion wiped off its market cap in just four months, warns it will have to mothball affected operations if things are not resolved by the end of September. That came as it scrapped its dividend and revealed cash had dropped to $178 million from $318 million over just six months.
• October 2017: Thornton strikes what seems to be a breakthrough with Magufuli, agreeing that Acacia would make a $300 million ‘good faith’ payment and for the government to take a minor stake in Acacia’s mines in return for the huge tax demand being scrapped. Acacia’s chief of finance, Andrew Wray, embarrassingly announces the miner couldn’t afford such a payment.
• November 2017: Wray, as well as CEO Brad Gordon, resign from Acacia. Peter Geleta, head of organisational effectiveness, takes over as interim CEO.
• February 2018: Annual results show Acacia plunged to a $700 million loss from a $242 million profit as a result of the ban. Geleta says no proposals have been received from Barrick nor the government and states that although progress has been made it is not privy to negotiations. Begins talking to Chinese companies that have partnered Barrick about a possible sale of the business or a stake in its mines.
• July 2018: No progress is made on reaching a settlement with the government, but Geleta says its ‘it’s better that it drags on and we get a good deal than to jump into a deal that isn’t good’.
• August 2018: Acacia chairman, Kevin Dushnisky, resigns soon after leaving his position at Barrick Gold.
• September 2018: Barrick Gold and Randgold announce their merger. Under an updated relationship agreement signed by Barrick and Acacia in 2014, the latter had a pre-emption right over any companies that Barrick buys with the majority of its operations in Africa, like Randgold. After Barrick makes it clear it would not support such a move Acacia confirms it won’t try to buy its larger peer.
• October 2018: Geleta says it is still waiting to understand what the merger means for the company, but states ‘it can only be good news’ because it ‘can’t be worse’.

Acacia, despite attempts to strike its own dialogue with the government, has been left in the dark about its own future, but has good reason to be optimistic about the merger. The miner is hoping Bristow’s African expertise can unlock a resolution with the government. Geleta said Bristow offers everything ‘that has been lacking in past when it comes to Barrick’ and the hope is he can succeed where Thornton has thus far failed.

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What Barrick Gold intends to do with Acacia following the merger is still unknown. It has tried to sell Acacia before, for example, to China National Gold in 2013. Its stake in Acacia could be up for the chop, although recent reports from Bloomberg suggest it is not only looking to keep its holding but take back full control of the miner. Either way, Bristow will have to find a resolution with the Tanzanian government first, whether it decides to take full control of Acacia or looks to offload the troubled unit. In the meantime, Acacia can only keep its fingers crossed.