Can Barrick’s Valuation Rerate Further after the Merger?


Jan. 9 2019, Updated 12:30 p.m. ET


Among senior miners (GDX), Barrick (GOLD) has the second-highest EV-to-EBITDA (enterprise value-to-EBITDA) multiple of 6.6x, which represents a premium of 1% to its historical multiple. Its multiple has rerated since its announcement of its merger with Randgold Resources (GOLD) to form an industry-leading gold company (SGDM) with the greatest concentration of Tier 1 gold (GLD) assets.

Since the announcement of the merger, GOLD’s multiple has expanded 18.5%.

Among its peers, Newmont Mining (NEM), Goldcorp (GG), and Kinross Gold (KGC) are trading at multiples of 8.2x, 6.2x, and 4.9x, respectively.

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As we discussed in Is the Barrick-Randgold Merger Enough of a Reason to Bet on ABX? Barrick’s costs are expected to fall, and its production profile is expected to improve on low-cost, high-quality assets after the merger. Since it owns five of the top ten Tier 1 assets in the world, its unit costs are expected to be significantly lower than its peers’. However, its new position will also add to its geopolitical risk.

Problems to overcome

Most of Randgold’s operations are in Africa. Due to many African countries’ rising resource nationalism and ambition to secure bigger shares in mining activities, many mining companies are facing difficult times operating in these jurisdictions.

Political problems in these countries could add to Barrick’s operational risks. In addition, market participants worry that the working styles of John Thornton, the new company’s executive chair, and Mark Bristow, its CEO, will clash, leading to problems for the company down the line.

As we discussed earlier in the series, the resolution of the company’s dispute with the Tanzanian government could be another major catalyst for its stock.

To achieve further upside, the company will need to show more execution on its projects and resolve its disputes successfully.


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