Dazzled by the prospect of reliable gold mining giant

AFTER food, craving gold is probably the oldest pursuit of mankind. But unlike the search for grub, the habit of stashing away the ‘yellow metal’ can often become a fashion, ebbing and flowing as circumstances change.

Strong, sustainable, durable gold mining companies are not exactly a by-word in the industry. However, I’ve seen indications the business could be getting trendy again. Next month will see the $6bn (€5.2bn) merger of Canadian giant Barrick Gold with the UK-quoted but African-focused Randgold Resources.

The deal creates a global gold mining behemoth which is saying all the right things about its hopedfor impact on the sector. For a start, it promises to address the short-term focus, undisciplined growth and pattern of poor returns that has bedevilled much of the gold mining sector over the years. That cannot be other than a useful promise.

People need gold for a variety of reasons. Apart from its use as jewellery and from the arcane purpose of putting it into the vaults of all the world’s central banks, it is also used extensively in the electronics industry. Interestingly, the Indian and Chinese jewellery industry is actually the largest source of demand.

For very good reasons, gold mining over the years has tended to be shunned by investors. It has become famous for ill-timed deals, wildly ambitious projects, overspending, poor capital discipline and excessive executive pay. The hopes are high that the all-stock deal between Barrick Gold and Randgold, the biggest gold mining transaction for many years, will bring together profitable mines in the USA and Africa with the new entity having five of the world’s 10 lowest-cost gold mines.

While Randgold shareholders will have one-third of the new company, the deal has upset some of its investors. It offers no premium and the new company is saddled with $4bn (€3.47bn) of Barrick debt.

In contrast, Randgold has cash in the bank. One of the reasons for the merger is Barrick’s need to boost its gold output, but new mines are costly and hard to find.

That means the big miners like Barrick are forced to buy assets, because they are a much cheaper option.

The merger also brings together two of the biggest personalities in the industry, John Thornton, chairman of Barrick, and Mark Bristow of Randgold. Thornton, previously president of Goldman Sachs, is considered by some to be a challenging personality, with a reputation for a tough management style.

Since his appointment, he has sold off assets, fired hundreds of middle management but has not developed any worthwhile gold reserves. It is anticipated that Thornton will be executive chairman of the ‘new’ Barrick and Mark Bristow the CEO.

Bristow, Randgold’s long-term boss, is a former South African army officer, a big game hunter and a trained geologist.

A founder-director of the group, he built the company mine-by-mine in some of the most inhospitable places in the world. He is regarded as a straight-talker and one of the best managers in the business.

Investors tend to admire the fact that he manages capital on a conservative basis and, surprisingly for a miner of a volatile commodity, Randgold has never had a write-down or reported a quarterly loss.

Over the years Barrick’s shareholders have had a bumpy ride.

For decades the darling of investors, its share price peaked at $53 having a market value of $54bn in 2011. Then they plunged and four years later were trading at $7 a share. Today after many painful years they have inched up to $12.70 a share, but its market value is only 30pc of that in its heyday.

Can Barrick regain its glitter? Analysts think so, pinning their faith on the new CEO.

While he has some issues to sort out, like strikes and political spats, Bristow has a proven track record and is a canny operator.

The merged grouping is worth keeping an eye on. But be warned, the track record of gold miners over the years has been only for the brave.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.