On Sept. 24, Toronto-based 
Barrick Gold (ABX), the world's largest gold producer, agreed to acquire Jersey-based Randgold Resources, creating a company that will have a market capitalization of over US$18 billion.
The deal is one of the most unique transactions in gold mining. The offer is all equity, with each Randgold share entitled to 6.128 new Barrick shares. The exchange rate is based purely on recent trading history and contains no premium for Randgold shareholders.
Once the merger is complete, Barrick will own approximately 66.6% of the new group, while Randgold will own approximately 33.4%, on a fully-diluted basis.
"In an industry that has a history filled with expensive acquisitions, resulting in high leverage, and deals that fail to deliver any value to shareholders, Barrick's proposed acquisition of Randgold stands apart," says Morningstar equity analyst Kristoffer Inton.
Morningstar analysts like this acquisition for three major reasons. First, current Randgold CEO Mark Bristow will become president and CEO of the combined company, with Barrick executive chairman John Thornton remaining in his current role. Bristow has a long record as a successful operator, especially in the challenging African geopolitical environment, Inton says.
"Political risk in Africa was a big issue for Barrick in the last couple of years, especially when you saw what happened with Acacia, but Barrick's already been working on improving their ability there, particularly through their relationship with China," Inton noted.
Tanzania's largest gold producer Acacia Mining is majority owned by Barrick. In 2017, the Tanzanian government slapped Acacia with a US$190-billion bill in unpaid taxes, penalties and interest.
Although the transaction exposes Barrick to some challenging areas that it had previously shifted away from, Bristow is one of the most qualified to guide the company, Inton said.
"Second, Barrick will add Randgold's two best mines, Loulo-Gounkoto and Kibali, to its portfolio of large, low-cost mines. The combined company will have five mines that produce more than 500,000 gold ounces, have mine lives longer than 10 years, and operate cash costs under US$700 per ounce. Brownfield projects at these mines offer additional upside from current production as well," Inton noted.
Finally, the unique transaction structure that Barrick and Randgold have agreed upon minimizes the risk that is usually seen from megamergers in the gold mining sector, Inton said.
"By avoiding a hefty premium, Barrick's risk of overpaying for assets that won't deliver is minimized. By relying on an all-equity transaction, Barrick avoids having to raise debt or pressure its balance sheet. Although no merger is without risk, we think the opportunity outweighs the costs in this structure”, he added.
“As a result, although we don't include Randgold in our current gold miner coverage, we don't think the acquisition will affect our fair value estimate by a significant amount after we update our model”, Inton said.
Randgold currently trades at about 9 times 2019 EBITDA estimates, in line with other higher-quality gold miners such as Agnico Eagle (AEM). Furthermore, Randgold's share price has fallen more than 35% year to date, in line with the broader gold sector amid weakening gold prices.
“We don't anticipate a change to Barrick's no-moat rating at this time," Inton added.
Based in Toronto, Barrick Gold operates mines in North America, South America, Australia and Africa. In 2017, the firm produced roughly 5.3 million attributable ounces of gold and more than 400 million pounds of copper. As of Dec. 31, 2017, Barrick had 64.5 million ounces and 11.2 billion pounds of proven and probable gold and copper reserves, respectively. Roughly 70% of Barrick's gold production comes from five large core mines in North America and South America.
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