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Stock Analyst Update

Barrick Improves Outlook With Unique Purchase

In an industry that has a history filled with expensive acquisitions, Barrick's proposed acquisition of Randgold stands apart.

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On Sept. 24,  Barrick (ABX) Gold announced the acquisition of Randgold Resources in one of the most unique transactions in gold mining. The offer is all equity, with each Randgold share entitled to 6.128 new Barrick shares. The exchange rate is based purely on recent trading history and contains no premium for Randgold shareholders. Pro forma ownership in the combined company will see current Barrick shareholders owning roughly 66% of the company and current Randgold shareholders owning 33%--a split that reflects their unaffected market capitalizations.

Although we don’t include Randgold in our current gold miner coverage, we don’t think the acquisition will affect our fair value estimate by a significant amount after we update our model. Randgold currently trades at about 9 times 2019 EBITDA estimates, in line with other higher-quality gold miners such as Agnico Eagle. Furthermore, Randgold’s share price has fallen more than 35% year to date, in line with the broader gold sector amid weakening gold prices. We don’t anticipate a change to Barrick’s no-moat rating at this time.

In an industry that has a history filled with expensive acquisitions, resulting high leverage, and deals that fail to deliver any value to shareholders, Barrick’s proposed acquisition of Randgold stands apart. By paying no premium, Barrick minimizes the risk that it overpaid or destroyed shareholder value. In addition, because the deal contains no cash component, Barrick will have to raise no new debt to complete the deal, saving it from pressuring its balance sheet as it had in past acquisitions like Equinox Minerals.

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Kristoffer Inton does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.