GOLD Randgold Resources Limited ADS Each Represented BY One Ordinary Share (delisted)

By Paul Garvey 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (September 25, 2018).

The mixed reaction to Monday's gold-mining megamerger underscores the challenges facing the North American gold sector, where shares have tumbled this year to discounts rarely seen outside significant market downturns.

Investors heartily applauded Barrick Gold Corp.'s agreement to buy Randgold Resources Ltd. for $6 billion in stock. Shares of Barrick rose 6% and Randgold climbed 7%.

But other gold-mining companies rose only modestly, highlighting the skepticism that Wall Street continues to hold for a sector hit hard in recent years by a flat gold price and concerns that some companies overextended themselves during the gold bull market that ended earlier this decade. Shares of AngloGold Ashanti Ltd rose 1.4% and Newmont Mining Corp. was flat.

Shares of some of the biggest U.S.- and Canadian-listed gold-mining companies are trading at an average of around 0.75 times their net asset value, 28% below where they were a year ago, data from Macquarie tracking prices in the U.S. and Canada show.

Price to asset value is a preferred measure for valuing mining companies because it takes into account variables such as the expected lifespan of mines and their output. The ratios are subjective and vary from analyst to analyst based on their assumptions.

A recent report by Bank of America showed that average price-to-NAV ratios were touching levels seen only fleetingly in 2013, when gold prices plunged, in the 2008 crisis, and around 2000 and 2001, when gold hit a low of $256 a troy ounce, compared with $1,207 Monday. Scotiabank estimates North American miners are trading at about half of the historical global average.

Bullion has fallen 12% since its 52-week high in January, but it isn't just gold prices that are weighing on the sector. North American mining companies' weak valuations reflect a continuing hangover from years of disastrous acquisitions and overleveraged balance sheets, as well as more recent blunders involving new mining projects.

Among the gold-mining companies with the weakest valuations, Centerra Gold Inc. is trading at roughly 0.5 times its NAV, according to the Macquarie data, after its shares fell 21% this year. Detour Gold Corp.'s price-to-NAV is at about 0.6, the data show, with the stock down 28% this year.

Barrick Gold and Randgold Resources have been hit as well. While executives at the two companies have focused on keeping costs in line and reining in debt, both are trading at steep discounts to asset value following steady declines in their shares. Barrick's price-to-NAV has fallen to 0.8 times after its shares slumped 30% since the start of 2018, while Randgold is trading at 0.6 times its NAV after its stock tumbled about 35% this year.

Joe Foster, portfolio manager of the $666 million Van Eck International Investors Gold Fund, said North American gold stocks were still working to unwind reputational damage they inflicted on themselves during the mergers-and-acquisitions and development frenzy leading up to gold's peak at nearly $1,900 in 2011.

"All these companies during the boom years, they were building projects that didn't generate good returns and blowing out their balance sheets and taking on too much debt," said Mr. Foster. "The companies were very poorly managed, and they really fell out of favor."

While some North American gold-mining companies have since improved their performance, by lowering operating costs, selling marginal assets and strengthening their balance sheets, they are unlikely to reclaim their traditional price premiums without some help from a gold price that is currently "stuck in the mud," according to Mr. Foster.

He said Barrick, along with Newmont Mining, Agnico Eagle Mines Ltd. and B2Gold Corp., had "cleaned up their balance sheets" and are "building projects with good returns."

Part of the problem is that dividends tend to be almost an "afterthought" among North America's gold stocks, according to Shree Kargutkar, a portfolio manager at Sprott Asset Management.

In contrast, the dividends that have become a regular feature of the Australian gold companies show not only the health of their mines but a determination by management to remain disciplined and reward shareholders along the way.

Australia's gold miners have also been insulated from the full impact of the falling gold price due to the simultaneous fall in the nation's currency, which has protected them from much of the tumult affecting overseas rivals. Australia is the world's second-biggest gold producer after China, where few gold-mining companies are publicly listed.

Producers from Australia are trading at more than one times their NAV. Mr. Foster said North American gold companies had historically traded at a premium to their Australian rivals.

"Those valuations have flipped, and we've never seen that before," he said.

Write to Paul Garvey at paul.garvey@wsj.com

(END) Dow Jones Newswires

September 25, 2018 02:47 ET (06:47 GMT)

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