Randgold Resources Ltd. (GOLD - Get Report) shares surged in London Monday after the Africa-focused miner agreed to an all-share merger witch Canada's Barrick Gold Corp. (ATX) that will create one of the world's biggest commodity groups.
Toronto-based Barrick will own around two-thirds of the combined group, the companies said in a statement Monday, with Randgold's Mark Bristow serving as CEO and Barrick's John Thorton keeping his role as executive chairman. The newly-created group will have a market value of around $18.3 billion, hold five of the world's ten largest bullion deposits and have the ability to produce around 5.5 million ounces of gold each year.
"The Boards of Barrick and Randgold believe that the Merger will create an industry-leading gold company with the greatest concentration of Tier One Gold Assets in the industry, the lowest total cash cost position among senior gold peers," the companies said.
Randgold shares rose as much as 6.1% by mid-day trading in London, a move that pegged the stock at £52.24 each but still left it with a year-to-date decline of around 29.5%. Barrick shares were marked 3.9% higher at $10.88, a move which would trim its year-to-date decline to around 23%.
Barrick's move to acquire Randgold will immediately bolsters its position in Africa, where it has a 64% stake in Acacia that is blocked by an export linked to a $200 billion tax dispute in Tanzania, and marks the first major expansion under Thornton, who has attempted to cut costs and focus on higher-quality assets, for the past four years. Randgold has also suffered a damaging strike in Côte d'Ivoire, while a new mining code in the Democratic Republic of Congo affects the whole industry.
"The combination of Barrick and Randgold will create a new champion for value creation in the gold mining industry, bringing together the world's largest collection of Tier One gold assets," Thornton said.
"Our industry has been criticized for its short-term focus, undisciplined growth and poor returns on invested capital," Bristow said. "The merged company will be very different. Its goal will be to deliver sector leading returns."
Spot gold prices, however, have been on a downward trajectory for much of the past four years, with spot values falling 12.5% -- $1,369 to $1,198 -- since May 2014. Gold mining industry impairments, meanwhile, have topped $85 billion since 2010, according to Paulson & Co. estimates.
Nonetheless, the combined group said it wants to grow its annual dividend, from the current level of around 3 cents per share, "over time".