Three takeaways from the Barrick-Randgold deal: gold price signals, FTSE 100 M&A boom and CEO longevity

Russ Mould
24 September 2018

“Initial investor reaction to the creation of the world’s biggest gold miner by market capitalisation seems favourable, as Randgold Resources’ shares are up and dragging those of other precious metals explorers higher for good measure,” says Russ Mould, AJ Bell Investment Director. “As shareholders digest the pros and cons of the recommended merger with Barrick Gold for Randgold in particular, there are three wider issues which all investors may need to consider in the wake of the deal.”

•    What, if anything, does the deal say about the beleaguered gold price?

•    Is the ongoing boom in mergers and acquisitions activity a good or a bad thing? No fewer than ten of the firms who were part of the FTSE 100 at the start of the year have since been acquired, received a bid, been involved in a merger, proposed a demerger or made a huge acquisition. The last year to be this busy was 2007.

•    For the second time in a year, the FTSE 100 will lose its longest-serving chief executive officer. Sir Martin Sorrell (32 years) stepped down from the helm at WPP in spring and Randgold Resources’ proposed delisting from the UK means Mark Bristow (almost 23 years) will no longer top the rankings. 

The gold price 

“At $1,199 an ounce, gold has gone nowhere fast in 2019, losing 8% of its value in dollar terms. This is partly because

•    interest rates (and Government bond yields) are rising – slowly – around the world, which lessens the relative attraction of gold, since it does not offer a yield and returns on cash and bonds are improving
•    the slow move to normalising interest rates by central banks, coupled with strong growth in the USA and the Federal Reserve’s move to withdraw its Quantitative Easing stimulus, is lessening appetite for a haven asset such as gold (despite the crises in Turkey and Argentina)
•    the dollar is going up, traditionally seen by traders  as a negative influence on the price, since it makes the metal more expensive for non-dollar based buyers

“As a result, gold traders have been stomping on the metal. According futures contracts data on America’s COMEX, where each contract represents 100 ounces of gold, non-commercial traders (funds and speculators) are running short positions at their largest level for at least 20 years, such is their conviction that the gold price will fall further.

 
Source: COMEX, Thomson Reuters Datastream

“The number of short positions has more than doubled year-on-year. But one every occasion that this has happened since 2013 – bar one - gold subsequently rallied. 

 
Source: COMEX, Thomson Reuters Datastream

“This will lead gold bugs to argue that the dumb money has gone short at precisely the wrong time – when the metal has already performed poorly – and that the smart money is piling in. 

“The same COMEX data shows that commercial traders - gold miners or consumers of the metal such as jewellers who may use futures contracts to hedge their exposure or lock in prices at a certain level- are currently net long of the metal, whereas historically they are net short (to protect themselves from any sharp drops in the value of their inventory or output).

 
Source: COMEX, Thomson Reuters Datastream

“The fact that the pros are buying gold and the punters are selling it is interesting – and could suggest that Barrick and Randgold Resources are positioning themselves for an upturn in gold by getting leaner and meaner, even if sceptics of the deal will argue it is a defensive measure prompted by necessity and lean times for their main product.”

FTSE 100 merger and acquisitions boom

“This has been a heady year for merger and acquisition activity, one that will fill the pockets of advisers and lawyers’ with fees and some shareholders’ and fund managers’ pockets with profits.

“Of the firms who started the year in the flagship FTSE 100 index, GKN and Sky have received successful bids, Shire is in the process of being bought by Takeda of Japan and Smurfit Kappa fended off an American approach.

“In addition, Sainsbury is looking to merger with Asda, Vodafone has acquired Liberty’s European cable networks in an €18 billion deal and now Randgold is looking to merger with Barrick Gold.

“Finally, Old Mutual is breaking itself up, Prudential is demerging M&G and SSE plans to demerge its retail energy supply business.

“That is ten firms involved in huge transactions. The last year to be this busy was 2007, when Corus, Gallaher, Scottish Power, Alliance Boots, Hanson and ICI were all acquired. Some may view this as a good thing – since acquisitions provide shareholders with cash which they can reinvest – and some a bad, since 2007 called the top of the market.

“At least in the case of Randgold-Barrick, many are arguing it is a defensive measure and not an example of the sort of animal spirits that can suggest management teams are losing their discipline and taking the sort of risks which can eventually lead to wider market setbacks.”

FTSE 100 CEO longevity

“When Randgold Resources delists from the London Stock Exchange, the FTSE 100 will lose its longest-serving CEO for the second time in a year.

“When Sir Martin Sorrell left WPP after 32 years at the top in spring that left Randgold’s Mark Bristow at the top of the longevity table, with just under 23 years at the helm of the gold miner (a span which includes the firm’s admission to trading on the London market in 1997).

“Once Randgold exits the FTSE 100 Lord Wolfson of Next will become the FTSE 100’s longest-serving boss. The index will also have just nine bosses who have served for more than a decade in their current jobs, since Sky and Jeremy Darroch are also about to drop out of the index following the Comcast bid and Vodafone’s Vittorio Colao will step aside next month. 

 

Company

CEO

Started

Years

Randgold Resources

D Mark Bristow

Oct-1995

23.0

Next

Simon Wolfson

May-2001

17.4

Ocado

Tim Steiner

Jan-2002

16.7

International Cons. Airlines

Willie Walsh

Jan-2005

13.7

Halma

Andrew Williams

Feb-2005

13.6

Associated British Foods

George Weston

Apr-2005

13.5

Taylor Wimpey

Peter Redfern

Jul-2006

12.2

Ashtead

Geoff Drabble

Jan-2007

11.7

GVC

Kenneth Alexander

Mar-2007

11.6

Sky

Jeremy Darroch

Dec-2007

10.8

Source: Company accounts

“However, British Land’s Chris Grigg, Unilever’s Paul Polman, Berkeley’s Rob Perrins and RELX’s ERIK Engstrom could all join the ten-year club in 2019.”

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