Shares in Randgold jumped 4.4% to 5,140p in early London trading while Barrick Gold shares gained 2.2% to US$10.47 in US pre-market.
Under the terms of the deal, Randgold shareholders will receive 6.1280 new Barrick Gold shares for each of their shares.
The merged company will be called New Barrick Group with Barrick Gold holding a 66.5% stake and Randgold owning the rest of the shares.
Randgold shares on the London Stock Exchange will be cancelled and New Barrick Group will list in Toronto and New York, operating under the branding of the Barrick Group.
Last year the combined revenues of the two companies totalled US$9.7bn and adjusted earnings (EBITDA) amounted to US$4.7bn.
Barrick said the New Barrick Group will have the highest adjusted EBITDA and adjusted EBITDA margin as well as the lowest total cash cost position among senior gold peers based on last year’s results. It will also own five of the world’s top tier one gold assets, Barrick added.
"The combination of Barrick and Randgold will create a new champion for value creation in the gold mining industry, bringing together the world's largest collection of tier one gold assets, with a proven management team that has consistently delivered among the best shareholder returns in the gold sector over the past decade,” said Barrick executive chairman John Thornton.
“Our overriding measure of success will be the returns we generate and not the number of ounces we produce, balancing boldness and prudence to deliver consistent and growing returns to our fellow owners, a truly simple but radical and achievable concept.
"There are no premiums in the merger because we strongly believe in the opportunity to add significant value for our shareholders from the disciplined management of our combined asset base and a focus on truly profitable growth."
Plans for merged group
The plans for the merged company are to expand its portfolio of tier one gold assets while disposing of non-core assets “over time”. It will also maximise the value of the copper business, which produced £413mln of copper last year.
Randgold chief executive Mark Bristow said: "Our industry has been criticised for its short-term focus, undisciplined growth and poor returns on invested capital. The merged company will be very different."
He added: "Its goal will be to deliver sector leading returns, and in order to achieve this, we will need to take a very critical view of our asset base and how we run our business, and be prepared to make tough decisions. By employing a strategy similar to the one that proved very successful at Randgold, but on a larger scale, the New Barrick Group will leverage some of the world's best mines and talent to create real value for all stakeholders."
Challenges facing Barrick and Randgold
The deal comes at a time when both companies are tackling separate challenges.
Barrick is currently negotiating with the Tanzanian government to end a dispute over Acacia Mining PLC (LON:ACA), in which it holds a majority stake. The government claims Acacia owes royalties on undeclared exports. The miner has been banned from exporting gold and copper concentrates since April 2017.
Randgold has been affected by the Democratic Republic of Congo’s new mining code, which became effective from June and requires companies to pay higher royalties and taxes.
A strike at Randgold's Tongon mine in Ivory Coast earlier this year also hurt production and followed similar stoppages at the operation earlier this year.
Sector-wide, gold demand has been hit by the continued strength of the dollar, which has made the commodity more expensive for foreign buyers.
Deal favours Randgold, says analyst
Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: "From Randgold’s perspective the deal diversifies exposure away from high-risk African markets and towards Barrick’s more stable North American assets. Given recent headwinds that’s welcome.
"The regulatory shakeup in the Democratic Republic of Congo has dented the share price and Randgold has also struggled to find new projects of scale, potentially holding up dividend growth in the years ahead."
Hyett added: "It’s also worth noting that Randgold has been trading at a premium to Barrick in recent weeks, so the deal does favour the smaller partner."
At the time, the group had argued that the London Stock Exchange delivered a better valuation for its African assets. "Given that fact, the decision to scrap the London listing is perhaps a bit of a surprise," Hyett said.