LAWRIE WILLIAMS: Could proposed Barrick/Randgold merger kick off new era for top gold miners?
Where the leader goes, others will follow! Arguably Barrick Gold is the company other top gold miners aspire to emulate, so will its proposed merger with Randgold Resources to buy in an alternative management strategy see other top gold miners follow suit in terms of management direction? If the proposed merger goes ahead and the ‘Randgold way’ is successfully implemented at what will again be the world’s top gold miner, the answer is probably yes!
Barrick was very much at the forefront of the production growth at any cost strategy which worked well in a continuing rising gold price scenario, but once gold peaked in 2011 and started to come down from its highs, the company was left with some hugely expensive capital projects on its books and a mountainous debt position. Most of its capital projects were too far advanced to be halted, although the horrendously costly, and technically complex Pascua Lama development straddling the Chile/Argentina border was able to be stopped, but only after expenditures of around $6 billion had already been sunk into the project. When gold was strong and rising mega producers like Barrick could handle costs like this and the banks were still falling over themselves to lend money accordingly.
But when the gold price plateaued and started to fall it was another story altogether. Profits and any fere cashflow were substantially reduced and big institutional shareholders who had been perfectly happy with the growth at almost any cost strategy pressured Barrick into top management changes and some fairly drastic cost cutting and debt reduction programmes. So it was with other major god miners too. They had been pursuing similar strategies to Barrick and found them selves in similar predicaments. In that period from 2012 to 2015 virtually all the gold major CEOs were ousted and replaced as were many others in exec management positions. The miners entered a period of unmatched austerity from which few have recovered to any meaningful extent. The industry as a whole has substantially reduced debt, has cut back drastically on capital projects and has cut, or reduced, various management tiers. But with a lacklustre gold price stock p[rices have continued to slip and shareholders with clout are not happy.
But all the while one tier one gold mining company with operations all in the unfavoured regions of West and Central Africa continued to grow without incurring massive debt and managing at the same time to sharply increase its dividend payments by sticking to strict new mine investment parameters. It largely relies on its own mineral exploration activities for growth, although has entered into some strategic partnerships. This miner is Randgold Resources which very much follows a different management pattern to the gold majors. It has a hugely slimmed down management structure in comparison with its peers nd no expensive head office to maintain. It is perhaps something of a one-man band through its founder and chief executive, Mark Bristow, who has remained firmly in charge throughout the company’s 23 year life but he has developed a management system which works and had built the company up to becoming the world’s 15th largest gold miner with annual output approaching 1.7 million ounces.
The Randgold success story has obviously come to the attention of Barrick Executive Chairman and ex-Goldman Sachs banker, John Thornton and he has taken what appears to be a bold move to see if the Randgold way can be applied to a much larger company. Thus Barrick and Randgold have agreed merger terms with Randgold’s Bristow taking over as the merged company’s President and CEO and his CFO, Graham Shuttleworth assumes a similar position at the merged entity. Indeed it seems to be something of a reverse management takeover!
There will undoubtedly a major culture clash to overcome – Bristow has in the past been highly critical of the big gold majors. He is almost certain to try to streamline and slim down Barrick’s management and perhaps implement a more disciplined attitude to costs and expenditures at the company’s operations, and again perhaps rationalise the management structures at the mines. There will also be further moves to sell off or close non-core and less profitable operations thereby reducing further Barrick’s still large debt position..
This will all not be an easy task and the success or otherwise will be followed avidly by Barrick’s peer companies among the gold mining elite. If even a degree of success is seen they will likely try to implement similar changes in management philosophy – as we said at the beginning, where Barrick leads others will follow.
If Bristow and his team is successful in its restructuring of Barrick’s management structure with beneficial results – and it’s a big if – we could see the development of a far more competitive, but perhaps leaner, top tier gold mining sector. Dead wood would be excised which could contribute further to a global gold production downturn and even if areas like gold exploration get new life, which is definitely probable under a Bristow-led regime, it will still take some years to bring any new projects to production so there is unlikely to be any resultant pick up in gold output.
One thing the merger announcement has done already is stimulate interest in the sector as the prospect of more M&A deals emerges as does the prospect of slimmed down management teams and greater emphasis on bottom-line profitability. This could provide the boost the industry needs to find some degree of investment favour again. But don’t expect it to lead to any pick up in global gol;d mine production. Perhaps the opposite!
25 Sep 2018