The saying goes that the best time to buy into a market is when ‘blood is running in the streets’. After a series of mostly disappointing Q3 results, media and commentators have been climbing into the gold majors, and many of these have seen their stock prices sink to new interim lows. Now may thus well be the time to climb back into investing in these stocks as they are likely to be at, or near, their low points as long as the gold price remains where it is at the moment, or moves higher over the remainder of the year as we think it will.
Our top choice now would be Barrick Gold (NYSE:ABX), given its proposed merger with recent high flyer Randgold Resources, and the acquisition of the latter’s management to guide it forward. Randgold, under Mark Bristow’s guidance, has been almost unique in building up to its current status as a top tier gold miner, without accumulating any debt. It has achieved this by only investing in gold mining projects which satisfy its key criteria of being profitable at $1,000 gold and being sufficiently large in size to be what it considers a ‘world class’ mine, which in Randgold terminology means one that contains at least 3 million ounces of gold.
Barrick, on the other hand, under past management, has chased mega-projects which may well contain a much bigger gold resource but are only developable at enormous capital cost, and has suffered from a previously untenable debt position as a result.
The merger with Randgold, assuming it goes ahead as planned, is a recognition that perhaps the best way of maintaining its dominant gold resource position is by merger with a smaller, but aggressive, gold miner which owns or controls substantial gold reserves, rather than by throwing money at massive new projects to maintain its No. 1 gold producer status. At the same time, it is promoting Randgold’s key management to run the much bigger business, apparently with a view to implementing the ‘Randgold way’ into its management ethos.
There will be a major culture clash between the Randgold and Barrick management philosophies, but with Randgold’s Mark Bristow as CEO, we suspect that, at least to a greater extent, the former’s management ethos will largely prevail, although it might be resisted strongly by Barrick’s current senior and middle management. But Barrick’s Executive Chairman, John Thornton, has been pushing the merger through in an attempt to change Barrick’s inbuilt management style, so the chances are that Bristow will come out on top. Even if half of what might be a new management direction is put in place, this could be hugely beneficial to Barrick’s bottom line.
We choose Barrick as being the gold major to go for above the others as the Randgold merger will give it a headstart on its peers who will all be watching avidly to see if any change in direction implemented by Bristow will work, or not. We assume it will work – at least to an important extent – at which point Barrick’s peers may well bite the bullet and try to implement similar management changes thus giving a re-rating to the whole sector. But this will all take time, and the benefits of any such changes are unlikely to be felt immediately, although one suspects that there will be some early spin-off in terms of further cost cutting and debt reduction as a counter to Barrick’s perceived benefits as first mover in what may be a new era for the gold majors.
Another area which might be pushed by the new Barrick management is to persuade the board to allow a more liberal dividend policy. Indeed pre-merger, both Barrick and Randgold have announced improved dividends, but even with the improved Barrick payout, existing Randgold shareholders will be taking a cut. One suspects that Bristow will work to close this gap once the merged company debt position is substantially reduced. Bristow does not like the idea of a debt overhang!
We see little but an upside for Barrick once the merger is in place, although the company’s shareholders may not like the increase in African exposure – particularly given Barrick subsidiary Acacia’s trials and tribulations in Tanzania. However, Bristow and Randgold have an excellent track record in dealing with more volatile African politics – which in effect are probably no more uncertain than investment in Latin American mining. Africa gets a bad press, but Randgold has managed over a decade of virtually uninterrupted growth, wholly in Africa, and this should speak for itself.
Overall, we see Barrick benefiting strongly from the merger (and effective reverse management takeover by Randgold), which should stand it in good stead in the months ahead. Given that, if the new management direction is seen to be successful, the other gold majors may well follow suit on Barrick’s coattails, then the whole sector could well be re-rated, and we could see a return to the gold majors outperforming in the years ahead.