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Barrick, Randgold Merging To Form Gold Industry 'Champion'

Energy

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2018 US Insurtech Report

Ondeck Now Open To Exploring Deals, CEO Says

Metals & Mining
Barrick, Randgold Merging To Form Gold Industry 'Champion'

Highlights

The New Barrick Gold Group would become, at least in the short term, the largest global gold producer by volume and by market capitalization.

The addition of Randgold's 1.2 million ounces of projected attributable production in 2018 to Barrick Gold's 4.8 Moz for the year pushes the combined entity's production above the 5.2 Moz projected for its closest peer Newmont Mining Corp.

Both companies bring to the merger what they consider "Tier one" mines, defined as having at least 500,000 oz/y of production, with total cash costs in the bottom half of the industry cost curve, over at least a 10-year mine life.

Oct. 10 2018 — Toronto-based Barrick Gold Corp.'s proposed merger with London-listed Randgold Resources Ltd. would create what the companies term "a new champion for long-term value creation in the gold industry," based on a large share of the world's "Tier One" producing mines, low total cash costs and strong management. Incidentally, the New Barrick Gold Group would become, at least in the short term, the largest global gold producer by volume and by market capitalization. The addition of Randgold's 1.2 million ounces of projected attributable production in 2018 to Barrick Gold's 4.8 Moz for the year pushes the combined entity's production above the 5.2 Moz projected for its closest peer Newmont Mining Corp.

Pending approval by both companies' shareholders, the deal is expected to close in the March 2019 quarter. The following analysis is based mostly on data compiled and analyzed separately for both companies as part of our Gold Reserves Replacement Strategies, 2008-2017 study.

When prices turned downward in 2012, Barrick acted

Once the world's largest gold producer in its own right, Barrick's attributable output of 5.3 Moz in 2017 was down 30% from 2008 and only just above that of Newmont. Output was expected to fall further in 2019, to 4.4 Moz, reflecting a strategic shift in the company's activities, away from a focus on production growth towards a prioritization of margin and an emphasis on balance sheet repair.

In 2013, in response to the declining gold price, Barrick wrote down US$13 billion of assets and placed 12 of its mines under review, which represented roughly 25% of the company's gold output at the time. Operations with all-in sustaining costs of more than US$1,000/oz — among them Bald Mountain, Round Mountain and Marigold in the United States and Plutonic in Western Australia — were put on the chopping block to improve free cash flow.

In 2015, Executive Chairman John Thornton articulated the company's strategy as one of focusing on gold, with no plans to diversify into other metals or to add to its existing copper position. Thornton outlined a plan to focus investment in the company's core regions to sustain high-quality, long-life assets in attractive jurisdictions.

Barrick's divestment and debt-reduction strategy is apparent in its M&A activity from 2015, when gold hit a six-year low annual average of US$1,160/oz, to year-end 2017, when it shed more than 14 Moz of gold in reserves through divestitures while halving its debt burden to US$6.4 billion.

Randgold did not engage in the same hunt for production growth that Barrick pursued in the late 2000s. While the company's gold output has been rising steadily over the past 10 years, tripling from 376,476 oz in 2008 to 1.1 Moz of attributable production in 2017, Randgold has consistently marketed its strategy as one of high hurdle rates, cautious reserve-price assumptions and a focus on margins. In terms of recent operating strategy, there is much that is complementary between the two companies in the proposed merger.

An enlarged portfolio of top-tier gold mines

Both companies bring to the merger what they consider "Tier one" mines, defined as having at least 500,000 oz/y of production, with total cash costs in the bottom half of the industry cost curve, over at least a 10-year mine life. Barrick has three: the Cortez and Goldstrike mines in the Barrick Nevada complex and Pueblo Viejo. Randgold has two: Loulo-Gounkoto and Kibali. The new management team is giving high priority to evaluating all assets with a focus on maximizing value on a relative few as quickly as possible and examining options for gaining value from others, including strategic partnerships and outright divestitures.

On an all-in sustaining cost basis, the five "Tier one" assets sit comfortably below or close to the median cost (US$983/oz), with a number of other producing assets also in the bottom half of the cost curve.

Concurrent with the Randgold merger announcement, Barrick reported a US$300 million mutual investment with Shandong Gold Mining Co. Ltd. The company said the investment is based on a two-pronged strategy: to have Shandong act as the vehicle for a Barrick push into China and to become a bigger partner in Latin America. Shandong's involvement could help pave the way forward for the stalled Pascua-Lama project in Argentina, looking at "an analysis of potential synergies between Lama and the nearby Veladero operation." On the company's first day of trade on the Hong Kong stock exchange, Shandong Chairman Li Guohong confirmed that negotiations centered on Pascua-Lama were under way. Barrick and Shandong formed a working group on the project when they struck a deal for nearby Veladero in 2017.

Trimming of the reserve base

Both companies currently have remaining reserves life of 11 years, based on their 2017 rate of production. Barrick's reserves base has been shrinking since 2013 — first because of a sharp cut in the reserves-calculation price in 2013, to US$1,100/oz from US$1,500/oz in 2012, and second because of the string of noncore asset divestitures averaging nearly 4 Moz of reserves annually over the past five years. Year-end reserves have fallen to 64.4 Moz of gold in 2017 from 138.5 Moz in 2008. Randgold, which has used a conservative US$1,000/oz or less in reserves calculations over the past 10 years, has been able to maintain year-end reserves between 16 Moz and 14 Moz since 2009.

Bringing more projects into production

While it holds a number of the world's largest undeveloped gold deposits, including Pascua-Lama, Alturas and Norte Abierto-Cerro Casale in Chile and Donlin in Alaska, Barrick's biggest challenge has perhaps been an inability to bring its own development projects to fruition. Randgold management's strong reputation for "developing and operating profitable gold mines in difficult environments" is seen as complementary to Barrick's "operational capabilities," according to Randgold CEO Mark Bristow, who has been named CEO of the New Barrick.

Barrick's pipeline consists mainly of expansion projects at existing mines, including Turquoise Ridge and Cortez Deep South in the USA and Lagunas Norte in Peru — all targeted to come online in 2021 or 2022. This reflects the company's conservative focus on brownfields investment. However, it has also invested in early stage exploration in the past 10 years and has shown considerable success in finding new orebodies, particularly in Latin America and Nevada. With total grassroots exploration budgets of US$804 million from 2003 to 2017, the company is credited with shares in 11 major gold discoveries, seven of which it still holds.

Although Randgold's development pipeline is currently modest, the company has successfully found and brought online four significant discoveries since the mid-1990s — all in West Africa, including Morila, Loulo and Gounkoto in Mali and Tongon in Cote d'Ivoire.

According to CEO Bristow, the company is aggressively hunting for its next big project in the African gold belts, as well as further afield, while also aiming to start developing three new projects over the next four years. Randgold's strategic threshold for all projects is a 20% internal rate of return at a US$1,000/oz gold price; new stand-alone deposits must, however, have a minimum size of 3 Moz of gold.

Randgold's flagship Loulo-Gounkoto gold mining complex in Mali, already one of the largest of its kind in the world, is still expanding, with the Gounkoto super pit and the new Baboto satellite pit joining its Yalea and Gara underground mines. Development of the Gounkoto super pit will extend the mine life by five years and make a significant contribution to the Loulo-Gounkoto complex's 10-year plan, which envisions production in excess of 600,000 oz/y at a gold price of US$1,000/oz.

In Senegal, the feasibility study for Randgold's Massawa gold project is nearing completion, with a development decision scheduled for the end of this year. According to Joel Holliday, Randgold's general manager of exploration, "continuing exploration is focused on expanding the Massawa reserve, and while it is still short of Randgold's 3 million ounce minimum requirement, the project's other metrics are positive."

Massawa was discovered by Randgold in 2007 and is one of the larger undeveloped gold deposits in West Africa. Its relatively long gestation period is a reflection of the company's tenacity and thorough approach to exploration, and a further example of its discipline in bringing projects to account.

Further refinement

The similarity in the two companies' currently projected production life suggests a merger that is focused primarily on maximizing the value of existing mines and projects, rather than on adding production. While the Randgold merger is at the forefront of Barrick's near-term plans, the company has clearly maintained its focus on core and 'strategic' assets, low production costs, preserving margins and value creation for shareholders. A forthcoming article will examine the potential scenarios for the evolution of the company's asset structure as this strategy takes hold.

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Technology, Media & Telecom
Nexstar Buys WGN For A Song; Divestiture Of WGN, Stakes In Food Channels Likely

Dec. 10 2018 — Walt Disney Co.'s pending acquisition of much of 21st Century Fox Inc. certainly raised the bar for cable network valuations — at 15.4x cash flow — and the divestiture of the regional sports networks may see another double-digit-multiple transaction with Amazon.com Inc. in the mix of buyers. Another deal, Nexstar Media Group Inc.'s pending acquisition of Tribune Media Co., sees stakes in three cable nets going to the buyer for single-digit multiples (6.9x).

The deal follows the collapse of Sinclair Broadcast Group Inc.'s deal to buy the company, which is now being litigated. We think that Nexstar is getting quite a deal on the cable network assets and will likely flip them for a quick profit.

When Discovery Inc. agreed to buy Scripps Networks Interactive Inc. in July 2017, the domestic cable networks were valued at $10.14 billion, or 10.5x cash flow, with Food Network (US) valued at $4.5 billion (Scripps owned 68.7%) and Cooking Channel (US) (also at 68.7%) valued at $525 million.

In the current transaction, the valuations come to $3.47 billion and $323 million, respectively. Thus, if Nexstar can get Discovery Communications to pay at least what it paid in the Scripps transaction, Nexstar may make a quick profit. Granted, minority interests typically trade at a discount. Scripps Networks Interactive, however, has tried for years to cut a deal to buy out the minority stake and it may be willing to strike a deal at a higher price to put this issue behind it.

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Insurance
2018 US Insurtech Report

Highlights

S&P Global Market Intelligence’s 2018 US Insurtech Market Report projects that U.S. private auto insurance premiums written via the direct-to-consumer channel will exceed $90 billion by 2022. The report also examines startup funding trends and identifies other business lines that could be ripe for insurtech disruption.

Nov. 30 2018 — U.S. insurance technology startups are numerous and still very much in their early years. As is common with an emerging fintech segment, investor and public interest in the space is high despite the risky nature of startup investing. The insurtech space had a recent gauge of public investor interest with the IPO of lead aggregator EverQuote. While the IPO priced above its expected range, the stock’s performance since then has been lackluster, a disappointing sign for others looking to go public. But many startups are still many years away from that goal, and there might be more investor appetite for different business models. Unlike Netflix and other companies that have caused wholesale disruption in various industries, many insurtech startups are working with incumbents rather than trying to replace them. Incumbents are avid investors in insurtech companies, and the digital agency model relies heavily, for now at least, on partnerships with established underwriters. Of the different insurtech business models, digital agencies and underwriters continue to attract the most funding and therefore form the focus of our report. Though many facets of their business model are not revolutionary, they have added meaningful innovation in some key areas. Certain business lines appear more ripe for innovation than others. In private auto, for instance, the direct distribution model already has a firm foothold and therefore seems less vulnerable to disruption by startups. S&P Global Market Intelligence projects that premiums written in the direct response channel will exceed $90 billion by 2022 and that they will account for more than 30% of overall U.S. auto premiums. But if the direct model can be applied to other lines, such as small business insurance or life insurance, that might produce a more dramatic challenger to the incumbent writers of those lines.

Early days

Interest in the U.S. insurtech space has spiked in recent years, fed by a large crop of startup companies. It is too early to assess how successful most insurtech startups and their investors will be as many companies are only a few years old at this point. In S&P Global Market Intelligence’s coverage universe, the median age of U.S. insurtech companies — based on the year they were founded — is seven years. But the recent spate of startups is even younger than that. The years 2015 and 2016 were a particularly bountiful time; companies founded in those two years alone account for roughly 22% of the coverage universe.

Appetite for disruption

One of the textbook examples of industry disruption is Netflix, which drastically reshaped the distribution of entertainment, first through its DVD mail service and again through its on-demand streaming service. These changes brought about the demise of in-store video rental giant Blockbuster, which reportedly had the chance to buy Netflix for only $50 million in 2000.

We do not foresee the same kind of seismic changes coming for much of the U.S. insurance industry, since the fundamental distribution model is not changing. The startups covered in this report — both digital agents and fullstack companies — are proponents of the direct distribution model, selling policies directly to consumers via their websites and/or mobile apps. But this is far from a novel concept. Areas of the insurance industry have embraced online, direct-to-consumer distribution for some time.

S&P Global Market Intelligence client? Click here to login and read the full 2018 US Insurtech Market Report

The projections reflect various assumptions regarding premiums, losses and expenses. They are a product of a sum-of-the-parts analysis of individual business lines that is informed by third-party macroeconomic forecasts, historical trends and recent market observations that include first-quarter 2017 statutory results and anecdotal commentary about market conditions. Projected results are displayed on a total-filed basis and are not intended for application to individual states, regions or companies. S&P Global Market Intelligence reserves the right to update the projections at any time for any reason.

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Ondeck Now Open To Exploring Deals, CEO Says

Highlights

OnDeck has never done an acquisition, but M&A is a possibility now that the company is generating cash, Chairman and CEO Noah Breslow said.

Breslow expects there to be consolidation across online lending companies in the near future.

OnDeck plans to launch a new product line, such as a business credit card or an equipment financing product, by year-end.

Nov. 30 2018 — Noah Breslow has been at the helm of On Deck Capital Inc. since June 2012, overseeing the company's initial public offering and several profitable quarters. The online lender has originated more than $10 billion in small-business loans and is one of the largest players in the industry.

In addition to originating its own loans, OnDeck recently launched ODX, a new subsidiary focused on a platform-as-a-service product for banks. OnDeck has operated that sort of white-label partnership with JPMorgan Chase & Co. for several years and will launchoperations with PNC Financial Services Group Inc. in 2019.

Now, the lender is open to doing deals, Breslow said. He sat down with S&P Global Market Intelligence in Las Vegas to talk about his company's future product plans and the broader online lending marketplace.

The following is an edited transcript of that conversation.

OnDeck CEO Noah Breslow
Source: OnDeck

S&P Global Market Intelligence: How do you view the current state of the online lending marketplace?

Noah Breslow: What you're seeing in that market is a bit of survival of the fittest. Many smaller companies are probably going to be sold in the next couple of years.

The advantages in the business go to those with scale: You can raise capital on the best terms, you collect the most data, so you can make the best decisions when you build your models, and you can reach more small-business owners more efficiently.

That being said, do you foresee being an acquirer?

We're open to it. We haven't acquired a company in 11 years of doing business. One of the advantages of now being profitable and generating cash is we can look around the market.

But we're designing our core business model so we don't need to acquire to hit our targets. Anything we do in the M&A sphere will be additive, and it will not be aggressive M&A. It's going to be reasonable bets to have a nice return or nice synergies, if we do it.

Is OnDeck considering starting other products outside of small business lending?

Not at this time. We focus on trying to be the best small-business lender in the world, but that can mean a lot of different products over time.

Today we have a term loan and a line of credit product. We've talked about four other products that our customers use: equipment financing, invoice factoring, Small Business Administration lending and small-business credit cards. Those are all fair game for us over the next couple of years.

We're on track to announce our third major product by the end of the year. One of those four will probably be picked.

Why is OnDeck focusing on small business lending rather than other offerings?

It's where underwriting is not commoditized. Student lending and personal lending are based on FICO. You can go to 10 different websites and get identical products.

In small business lending, the intellectual property around the OnDeck score is unique.

I like being able to differentiate in that way. It creates a sustainable advantage for our business, whereas if we were just using FICO to underwrite, anyone can buy that and get into the market.

OnDeck's white-label product lets banks use its technology to streamline their own lending process. In those partnerships, do you face regulatory restrictions with the use of alternative data in underwriting models?

When we're partnering with banks, it's critical that the bank has a lot of control over the credit model and the data being used for decisioning.

The model we use with JPMorgan Chase was jointly developed between OnDeck and Chase, so obviously Chase was very comfortable data. The model we're using with PNC is more of PNC's design, and we're advising on its creation. In both cases, we're using data that's right down the middle of the fairway — business credit, business cash flow and evaluating the business owner — but nothing too esoteric.

In our own business at OnDeck, we can use more alternate data because we don't have the same modeled governance that a bank might have.

Are you using machine learning to synthesize data sources and create new models based on alternative data?

Some players out there have tried to go purely digital and almost let the computer decide how to make the decision. We don't believe in that.

We have a hybrid model, where people with a lot of commercial underwriting experience are working in concert with advanced modeling techniques to get the result.

OnDeck's charge-off rates have declined year over year in 2018. Is there correlation between these lower rates and your updated models using more alternative data?

Our credit models have improved over the last year, and alternative data definitely contributes.

Many of our improvements in the last year have been structural or operational. I view the modeling improvements as even more upside potential from here.

We noticed after we loaned our first billion dollars that our credit models got a step-function better. Now, with $10 billion under our belts, it's again happening. We can do a lot of data-driven decision-making about who we approve and who we decline on many years of history now.

It starts to become more powerful. That's why you see these scaled-up companies like American Express or Discover Financial or Capital One. They're reaping the benefits of decades of lending, and hopefully we'll be in the same place.

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