Shares of gold mining giant Barrick Gold Corporation (NYSE:GOLD) are up roughly 20% since Sept. 24, and Randgold Resources Limited's (NASDAQ: GOLD) stock is up 20% since the same date. The broader gold mining peer group, as measured by VanEck Vectors Gold Miners ETF, is up just 3% over the same time period, roughly in line with the price of gold. Why are Barrick and Randgold outperforming the others, and can they keep up the impressive run?
Closing in on the big day
The big news that pushed Barrick and Randgold higher was the proposed stock-for-stock merger between the two miners. Although the deal is structured so that one share of Randgold will be exchanged for one share of Barrick, this isn't really a merger of equals. After the deal is consummated, Barrick shareholders will effectively own two-thirds of the new company and former Randgold shareholders will own one-third. So it's really Barrick buying Randgold.
Normally the shares of the acquiring company fall after an acquisition is announced. The fact that Barrick's shares have advanced right in line with Randgold's means investors really like the deal. And there is a lot to like, as it expands Barrick's footprint to include Randgold's Africa-focused portfolio, leaving the company in control of half the world's tier-one gold mines. The combined entity will also have industry-leading reserves and cash costs that are among the lowest in its peer group.
The real work is yet to come
While investors are clearly excited by the deal, the heavy lifting won't really begin until the deal is closed sometime in early 2019. That's because the pair have huge changes planned. For starters, the CEO of Barrick (John Thornton) will become chairman of the board of the combined company, with the CEO of Randgold (Mark Bristow) taking the CEO slot. Each will have very distinct goals.
Bristow, as CEO, will focus on cutting costs and improving efficiency, which should be right up his alley. Barrick's Thornton recently noted that Bristow runs Randgold with just seven people at the head office. Barrick's administrative staff has been slashed from 1,300 to 300, so a lot of cost-cutting has already been done.
It's unlikely that the combined entity will ever get down to just seven people at the head office, but Bristow clearly knows how to run a lean ship. Investors should keep an eye on the day-to-day issues Bristow deals with because they will be a key determinant of its long-term success. However, Bristow's work will likely be overshadowed for a couple of years by Thornton's efforts.
Thornton, as the chairman, will focus on portfolio-level changes, buying --and more likely selling -- assets. This is exactly what he's been doing at Barrick for a couple of years. Post-merger, he has aggressive goals for himself, holding up Barrick's rapid pace of asset sales (jettisoning seven assets in just a year and a half at one point) as the target. The hope is to leave the new Barrick with a well-positioned and low-cost portfolio of mines.
Selling assets will capture the market's attention, but it also means investors need to keep a close eye on what's left behind. The moves Barrick has been making have greatly improved its balance sheet (long-term debt has been cut in half since 2015) and helped to keep costs low (cash costs fell nearly 12% between 2015 and 2017).
But production also fell as assets were removed from the portfolio. Between 2015 and 2018, production will have fallen around 20%, using the upper end of the miner's 2018 production guidance. Barrick's operating performance benefited from the pruning, but you can only cut so deep before you hit bone. Investors will eventually want to see growth, which will fall on Randgold's Bristow since he will, effectively, be running the mines that are left.
That's a relevant issue because Barrick's cash costs (a metric that looks at just the costs of extracting gold from the ground), excluding any impact of the proposed Randgold merger, were slated to head higher this year. Meanwhile, the company's all-in sustaining costs (which include capital spending on things like maintenance and exploration to sustain production) bottomed in 2016 at $730 an ounce. All-in sustaining costs were projected to range between $750 and $875 for the next five years or so. (Gold, for reference, is currently trading in the $1,200 range.)
It basically looks like Barrick has reached the point where shifting the pieces around is no longer enough. Adding the Randgold portfolio will provide Thornton with a second round of assets to play with. However, it's only a matter of time before all the desirable portfolio changes have been made. And the portfolio left behind, including development projects, needs to carry performance.
Don't get too excited
After a sharp advance in share prices based on enthusiasm for the deal, most investors should probably take a wait-and-see attitude here. There will be a lot of work to do following the merger -- notably two CEOs attempting to work together to run the combined entity. The headline-grabbing changes will be driven by Thornton's portfolio pruning. While that's clearly going to be important, don't overlook Bristow's efforts to manage the costs and production of the mines left behind -- that will really drive the combined company's long-term performance.