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Barrick's Randgold acquisition may spur more gold mining deals

Gold miners earned the ire of investors including billionaire hedge-fund manager John Paulson for entering into bad deals that destroyed shareholder value in the past. Shareholders of the two companies announcing a merger Monday signaled they think this time may be different.

Barrick Gold executive chairman John Thornton said his company isn’t paying a premium under its agreement to buy Randgold Resources. The decision came after the company has been criticised for its “ undisciplined growth and poor returns” in the past.

Investors’ patience is being tested as mining companies struggle to strike a balance between protecting shareholder value and adding assets that could boost their output. Judging by the rally in Barrick and Randgold shares Monday, improving production prospects may be enough to keep them happy for now.

The market may see a “wave of consolidation we’ve waited for,” Michael Siperco, an analyst at Macquarie Capital Markets, said in a telephone interview. Barrick’s acquisition may spur more interest in deals, “or at least cause the market to revisit the thesis.”

The combined gold reserves still buried in mines -- an indicator of production prospects -- shrank by almost half to 11.3-million ounces last year, from its peak in 2012 after companies cut spending on exploration and development of new projects, according to Bloomberg Intelligence data on 15 big producers. That highlights the urgency for mining companies to add projects to boost their production outlook and revive fading investor interest in the sector.

Barrick may also sell “non-core assets,” creating buying opportunities for other companies, Shree Kargutkar, a portfolio manager for Sprott Asset Management, which oversees about $8.9-billion in assets, including gold mining equities, said in a telephone interview Monday.

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