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Why This Gold Stock Soared 13% Higher in October

By Reuben Gregg Brewer – Nov 6, 2018 at 9:44AM

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Barrick Gold's shares rose last month, but not because of a gold rally. Here's what you need to know.

What happened

Shares of Barrick Gold Corporation (GOLD 1.57%) rose 13% in October, according to data provided by S&P Global Market Intelligence. Gold, meanwhile, was only up around 2% for the month, with peers like Newmont Mining basically tracking gold's price advance. Barrick's jump was therefore notable. However, the strong performance actually traces back to late September.

So what

On Sept. 24, Barrick announced that it would merge with Africa-focused peer Randgold Resources Limited (NASDAQ: GOLD). Since that news hit the market, the shares of both gold miners have risen sharply (Randgold was up around 11% in October). Once complete, Barrick shareholders will own roughly two-thirds of the combined company, with Randgold shareholders owning the remaining third.   

A pick on a pile of gold nuggets

Image source: Getty Images.

In other words, Barrick is effectively the acquiring company here, which makes the stock's advance that much more interesting, since the share price of the acquiring entity in an acquisition often falls after a merger is announced. In this case, however, Barrick is actually up more than the company it is buying. Clearly, investors believe this is the right move for Barrick to make.

In fact, buying Randgold is something of a change for Barrick, which has been culling its portfolio in recent years and generally shrinking production and reserves. The goal was to maximize free cash flow by focusing on the gold miner's best assets. The latest move suggests that it is looking to shift back toward growth again, taking on a new portfolio of assets that will allow it to further its optimization efforts.   

Now what

The deal is expected to close shortly, which is when the real work starts. So the share price advance is nice to see, but the proof of success won't be clear for some time. In fact, investors probably shouldn't jump into Barrick at this point. After the stock's big gains, it would be more prudent to see what Barrick actually plans to do with the combined portfolio after the merger is complete before investing.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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