Merger Market
Randgold/Barrick deal could show path to motherlode of mining M&A
Analysis03 OCT 2018
• Industry needs further consolidation, says Sibanye CEO
• Randgold merger is largest sector deal globally in two years
The positive market reaction to Barrick Gold's [NYSE/TSX:ABX] proposed acquisition of Randgold [LON:RRS] could lead to a wave of M&A in the gold mining space, according to industry executives and advisors.
By crafting an all-stock deal with no premium that creates a USD 18.3bn company, Barrick and Randgold circumvented arbitrage players that have typically pulled down the share price of acquiring mining companies in recent years, the advisors said. Those market forces have left many miners afraid to make deals, the industry sources largely agreed. In this instance, shares in Randgold have rallied 7.4% since the deal’s announcement, while Barrick’s have rallied 11.8% as of this writing.
"It's been like a school dance and everyone was waiting to see who is the first to ask someone to dance," Paul Benson, CEO of SSR Mining, said last week on the sidelines of the Denver Gold Forum in Colorado Springs, Colorado. "Now they're up and if it works out, you'll see more people take a chance. But if it doesn't, you'll see them standing even closer to the wall."
The acquisition of Randgold represents the largest deal in the mining sector since October 2016 across all geographies, according to this news service’s data. In 2018 through today (3 October), there were 164 mining sector deals globally, accounting for a total deal value of EUR 35bn. Over the same period last year, the deal count in the mining sector was 19% higher, totalling 195, with a 25% lower total value of EUR 26bn, data show.
Intermediates producing between 200,000 and 1m ounces of gold are the most likely to be looking for a dance partner, a first sector advisor said. The no-premium structure “may be what it takes to get mining deals done,” said a second advisor. Companies may find more value in “shuffling the deck of assets,” sharing the upside and finding synergies, he said.
A third advisor said Endeavour Mining [TSX:EDV] is "well-placed to lead consolidation." Endeavour’s portfolio in Africa could make it a logical acquirer for Centamin [LON:CEY], a sector executive noted.
In December 2016, the Financial Times reported that Egypt-focused gold miner Centamin, was the subject of takeover speculation.
The report noted that the shares were cheaper than rival gold miners at the time, partly due to a drawn-out legal challenge over the company’s mining license.
The market’s continued devaluation of gold miners creates opportunities for consolidation, the sector executive said. The same number of companies and management teams increasingly oversee fewer dollars of corresponding value, he said.
A second sector executive flagged OceanaGold, Guyana Goldfields and New Gold as among the handful of companies that could take part in M&A if the pace of deals picks up. OceanaGold has the potential to be a consolidator in Austrailia, according to the second executive, and its CEO told this news service last year it has the capability to do a large deal similar in size to its 2015 acquisition of Romarco for CAD 856m. Guyana Goldfields told this news service last week at Denver Gold that the company sees itself as a target for a larger producer if it can push up production. And Reuters reported last month that BMO Capital Markets is advising New Gold as it ponders a sale process.
"Industrywide, there is definitely a need for further consolidation. It's the right time to do it," Sibanye CEO Neal Froneman said on the Denver Gold sidelines. "It would be good for the industry, good for investors and good for sustainability."
Sibanye has announced two significant deals over the last two years; , a cash-heavy deal for platinum group metals producer Stillwater in December 2016 and a yet-to-close all-stock buy of Lonmin announced in December 2017.
A sector investor said when acquirers pay no premium, investors have to judge the deal on its fundamentals and merits, and they in turn give a clearer signal of what the market thinks of a deal.
"When you have a premium, half the stock end up in the hands of arbitrageurs that churn the market for 6 months," the investor said. "I hope other companies get this."
The EUR 4.6bn Randgold takeover, is followed in size by Indonesia Asahan Aluminium’s EUR 3.3bn acquisition of a 42% stake in Freeport Indonesia announced last Friday (28 September), and by the EUR 2.7bn sale of Australian Coal & Allied Industries by Rio Tinto to Yancoal Australia Limited in January 2017.
Barrick is using M. Klein and Co. and Morgan Stanley as financial advisors. Davies Ward Phillips & Vineberg, Freshfields Bruckhaus Deringer, Cravath, Swaine & Moore and Carey Olsen are its legal advisers.
CIBC and Barclays are financial advisors to Randgold. Its legal advisors are Norton Rose Fulbright, Stikeman Elliott and Ogier.