The Big, Desperate Gold Industry Move

Written by Adam English
Posted September 25, 2018 at 12:25PM

Big news is rocking the gold industry and gold executives are abuzz.

They’re all at the Denver Gold Forum in Colorado where Barrick Gold announced a $6.5 billion all-stock deal to merge with Randgold Resources. It's the largest deal in the industry in 15 years.

Both companies saw share prices pop upwards a handful of points as the markets, analysts, and market commenters reacted positively.

Gold executives were pretty shocked, as both large companies had their own things going on. Randgold has a niche in African mines while Barrick gets most of its gold out of the Americas.

However, all of them are wondering if it’ll kick off a wave of mergers and pull investor attention back to a largely neglected sector.

Both may be true, but don’t buy the narrative about this being a bold play to shake things up.

If anything, the deal reeks of desperation.

Fighting The Inevitable

The Barrick-Randgold company that will emerge from this will have a lot going for it.

It’ll own 5 of the top 10 lowest-cost mines and have the highest adjusted EBITDA, highest EBITDA margin, and the lowest total cash cost position among its peers.

All are great things, no doubt. But all of those metrics are under threat across the industry.

Here is why:

This is why Barrick went after Randgold. It desperately needs to raise the amount of gold it gets out of the insanely large amounts of material it processes.

Gold reserves have seen a massive decline over the last half century.

Back in the 1960s, average levels were above 10 grams per tonne. They’ve fallen about 90% since.

The top five gold miners by size averaged 1.12 grams per tonne last year.

It's a trend that is incredibly hard to fight. The easy-to-find rich ore went first, and the industry has steadily worked its way down the line.

At around 1 gram per tonne, it simply becomes uneconomical to process so much material for a couple flecks of gold.

Coupled with the fact that the large miners have sacrificed reserves to pay off debt and boost profitability, it becomes clear that the major miners are well on their way down the path to an existential crisis.

It’s telling that the Barrick-Randgold deal comes with no premium at all for Randgold shareholders. Both companies now need to prop each other up.

The Deals Coming Soon

This big deal makes a lot of sense for Barrick. It’s a massive company, and it makes sense for senior management to look for large deals to boost business.

It's kind of like how Warren Buffett looks for big deals and investments — moving the needle, so to speak, is next to impossible by going after more promising but much smaller companies.

But that is exactly what the major miners are going to have to step up and do, and soon.

They’re slowly mining themselves out of existence. Big mergers won’t change that for long, a flurry of small acquisitions will.

Even though industry grades have fallen to near-crisis levels, there are prospective mines out there with grades that will be profitable and reserves large enough to make paying a premium to buy them worthwhile.

We will probably see some other large miners merge as well after this, but the smart ones are keeping an eye on much smaller operations.

The same goes for investors, and it's a great time to establish a position that will profit from what’s to come.

Take care,

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Adam English

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Adam's editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor's page

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