What the Barrick-Randgold Merger Means for Gold
Thursday, 9/27/2018 11:52
3x lessons from the ABX-RRS gold mining M&A news...
DESPITE the trillions of pixels already spent on news of the Barrick-Randgold mining merger,
writes Adrian Ash at BullionVault, everyone in the gold industry still wants to know...
Will Mark Bristow start slashing costs at Barrick by selling the Gulfstream and taxiing John Thornton around in his own private jet?
Today the word "DISCIPLINED" jumps out to shock unwary visitors
scrolling through Barrick's corporate website.
Whether the word screamed off the homepage before Monday's announcement of a new "champion for long-term value creation in gold", this pundit can't say.
But the adjective sounds a good fit now that the world's No.1 gold miner hopes to be managed by the No.1 gold-mining CEO.
"Bristow's personality looms large," gushes Bloomberg about the Randgold boss, set to become chief exec' of the 'New Barrick' if shareholders approve the plan.
"He's fond of cigars and big-game hunts, as well as motocross expeditions across Africa. He's been known to use his pilot license to fly investors directly to African mines via his private plane, and run Randgold from top to bottom, often personally handling its investor and media communications."
Barrick's executive chairman John Thornton makes good copy too. But even "flying commercial is not his style," said
a Globe & Mail profile this month. Instead, the ex-Goldman Sachs banker chooses to travel "on Barrick's Gulfstream V jet."
That might sound like the height of C-suite luxury, funded by the "lifestyle business" which pampered executives have carved for themselves out of the dirty, dangerous business of digging gold out of the ground.
Or so gold-mine engineers, analysts and stockholders have been heard to spit. Mark
Bristow has repeatedly berated the industry for short-term thinking, "exploitation" and outright "racism", too.
"The board must be held accountable for the value destruction, disregard for shareholders, poor disclosure practices, failing leadership and culture of entitlement...over many years."
So says hedge-fund investor John Paulson about small-time player Detour Gold Corporation (TSE: DGC), attacking the Board of Directors for not letting him replace them all.
Paulson, you will remember, bet against sub-prime US mortgages ahead of the financial crash. He then switched into gold ETFs and gold mining stocks as the crash became a crisis.
That made him look awful smart for a while.
But sticking only with gold – plus a handful of other highly concentrated ideas – Paulson's performance steadily became
awful since the bullion price peaked in 2011-2012.
Now Paulson has launched a new activist group – the
Shareholders Gold Council – to try and push mining bosses into running their investments more carefully.
A cynic (or mining exec') might say people Paulson is blaming gold-mine executives for his own poor investment returns. A bullion salesman might add that, compared to just buying and owning the metal, mining investment risks remaining "a crappy, crappy business" as broker Doug Pollitt put it in
his excellent 2014 presentation to the Denver Gold Conference.
But a more charitable view might suggest Paulson just offers a one-man lesson in the need to
spread your assets and diversify.
Back at No.1 miner Barrick meantime, Thornton "greatly admires Randgold and wants to emulate its superior returns," the
Globe & Mail went on in that profile piece, posted 10 days before the merger news broke.
Thornton apparently swore blind to the paper that he wasn't looking for a CEO. Maybe because he'd already found one.
"Randgold," the paper went on, "has earned a 93% total return for shareholders in 10 years; Barrick, a 61% loss."
Gold bullion itself has gained over 60% in US Dollars terms since the depths of the Lehmans' crisis, and doubled or more for investors outside the greenback.
But Barrick shares are far from alone in lagging the yellow metal so badly.
"Some shareholders make the facile assumption that growth in ounces leads to growth in other financial metrics, and we know that's not true," Thornton said ahead of the Randgold proposal.
Yet here comes the 'New Barrick' (or "
Bristow's Randick" as one wag suggests), stressing how the ABX-RRS meger will confirm its No.1 status, so very nearly lost to No.2 Newmont (NYSE: NEM) this year.
No doubt this will please those Barrick shareholders who mistake size for quality. But those ounces will also get the "DISCIPLINE" of Randgold's own CEO as well as adding its Central and West African projects to Barricks's North American focus. And so Barrick is also very, very keen to stress how efficient and low-cost the merged venture will be, even before Bristow gets to work on the Canadian giant's existing portfolio.
Randgold shareholders, in contrast, might wonder
what's in it for them. Outside of end-2015's takeover and
delisting of Russian miner Polyus (since re-listed as Polyus PAO (MCX: PLZL) at exactly the same market value despite gold trading 15% above that winter's multi-year lows), this is the gold-mining sector's largest stockmarket deal since gold prices peaked in 2011. Yet it pays RRS owners no premium for losing the focus of their founder and CEO. Nor does it pay any compensation for getting lumbered with the sector's largest legacy laggard.
For the rest of us? Three lessons so far.
First, gold mining stocks are not gold.
You might think that's obvious. But finance journalists keep telling people that "one way to invest in gold is to buy mining shares."
A glance at their relative performance shows how wrong that is.
Over the last two decades in fact, the Amex Gold Bugs index of gold-mining stocks (INDEXNYSEGIS: HUI) has underperformed the price of gold two-thirds of the time on a 12-month basis.
Even when gold prices rose from 12 months before, the HUI rose faster only half of the time.
So much then for that famous "leverage" to the gold price. A lump of unrusting metal – used to store value in all culture and all ages since humans discovered it – trades very differently to the risks of credit, management, politics, environment and investing fads which mining stocks carry.
Second, mergers and acquisitions in the gold-mining sector never result in greater mining output overall. The merged business always produces less than the two separate parts did before hand.
Barrick-Rand looks set to confirm this fact.
Bristow himself said on Monday that "Our industry has been criticised for its short-term focus, undisciplined growth and poor returns on invested capital.
"[This] merged company will be very different. Its goal will be to deliver sector leading returns, and in order to achieve this, we will need to take a very critical view of our asset base and how we run our business, and be prepared to make tough decisions."
Hard to hear the sound of heavier combined output in that statement. Not above the sound of the axe swooshing towards Barrick's corporate HQ.
"Randgold
currently has very disciplined general and administrative costs at about $7 per ounce, compared with Barrick's $77," says Charles Cooper, head of mine economics at consultancy Metals Focus, speaking to delegates trying to digest the New Barrick news at this week's Denver Gold Forum at Colorado Springs.
That "sets the stage for the combined company to significantly reduce its cost profile from the get go."
Third and last however, Barrick's move might spur a short-term opportunity for shareholders in other, smaller producers, because digging for gold in the stock market might now come back into vogue after struggling since the price peaked.
M&A spending has sunk over the last half-decade, dropping by one-third in 2017 alone, with majors chasing only small producers and minor miners getting together to try and find some cost savings amid the drop in bullion prices.
But if its ounces you want, M&A still looks much more effective than trying to dig for more gold in the ground.
Data from rating agency
S&P's mining team say that over the last 10 years spending on gold-mine exploration has totalled some $54 billion worldwide.
That's around three times the annual rate of spending seen over the previous two decades.
But the amount of gold it discovered?
That fell by four-fifths according to the numbers from S&P Global.
Gold is getting tougher to find and harder to mine, in short.
And if other big players do try to ape Barrick with the facile assumption that bigger is better, digging for gold on the stock market won't do anything to grow future output in total from this year's new record high.
Quite the reverse, in fact.
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