The big news in the resource sector this week is the merger of two of the world’s largest gold mining companies, Barrick Gold Corporation (ABX) and Randgold Rescources Limited (GOLD).
Disclosure Notice: I do not own shares of either of these companies.
Barrick is the top dog in the space, with major gold mines in the US, Canada, Australia, South America, Saudi Arabia, Papua New Guinea, and Zambia. Randgold is a major producer with mines in several African countries. Both are long-lived and highly storied companies. The US$18.3-billion deal was big enough to make top headlines in the larger financial media outlets.
So why merge?
Analysts have commented on how Barrick’s production has been dropping for years, down from over eight million ounces a few years ago to just over five million now. This deal shores production back up again, helping Barrick maintain its grip on the “world’s largest gold miner” title.
Why this title should matter more to investors than “world’s most profitable gold miner,” I can’t fathom. And why Barrick shareholders should be pleased to take on high-cost production in politically risky African countries makes even less sense to me. But ABX shares are up on the news, so clearly plenty of investors think this is a great deal.
From the perspective of Randgold shareholders, this makes more sense. They get diversification out of Africa. They also get exposure to the upside in some very low-cost mines. I’m not surprised to see GOLD shares up today. If I did own shares, I would not buy more because of the merger; I’d see the deal’s updraft as an exit opportunity.
On the other hand, if I were looking to buy shares in a big gold producer, I can see how this news would get my attention. This is a big deal. It will put the new Barrick head and shoulders above its closest rival (Newmont Mining, NEM).
But when did mere size become the most important factor?
To be fair, analysts on financial news shows keep stressing the similar management styles of the two companies. They see the two as a good fit, having similar approaches to acquisitions and operations. Synergies are good, right?
Not necessarily. Similarity of corporate culture might make for a smoother merger, but it doesn’t save any money. If both companies had operations in the same countries, they could shut down redundant offices and save money. They could order larger amounts of supplies and achieve savings from economies of scale. But that’s not what this deal offers, and a few departures from the head offices don’t pack the same punch.
There’s a lot more I could say, especially regarding the technical and political challenges both companies face. As important as these issues are, the biggest reason I’m not a buyer is that these companies are struggling to deliver consistently and well to the bottom line. Combining these struggles seems like a bad idea to me.
Let me show you. Here’s a snapshot of Barrick’s recent quarterly and annual financial performance, as reported by Yahoo Finance.
To give credit where due, Barrick has delivered more to the bottom line over the last four years, even as the top line has decreased. That’s admirable. On the other hand, the big miss last quarter is a concern, and it’s not clear the improvement will continue.
Now let’s look at the same data for Randgold…
The chasm between the company’s revenue and earnings isn’t really improving, and the quarterly misses are consistent and alarming.
Now, imagine adding these financial snapshots together in your mind. How does this make for a more attractive image?
In my mind it doesn’t.
Caveat emptor.
