This article first appeared at Moneyweb.
We are now in the era of the gold mining super-deal. The only question that remains is who will emerge king of the mountain.
Yesterday Barrick CEO Mark Bristow (pictured) put forward an unsolicited US$18 billion offer for Newmont Mining that he says will unlock S$7.5 billion in shareholder value through better sharing of mining facilities and other synergies. But for that to happen, Newmont would have to abandon its S$10 billion share buyout of Goldcorp, a deal that would make it undisputed king of the gold mining world, and tie the knot with Barrick.
Mining groups are in a race to hoover up the best assets in the world and extend their average life of mine. The gold price remains stubbornly subdued, while ore yields are falling and costs rising.
Barrick is barely two months into its S$18.3 billion merger with Randgold, and is now making a pitch for the biggest prize in gold mining. Has it bitten off more than it can chew? No, says Bristow. The same management team that turned Randgold into the envy of the gold mining world is now in place at Barrick, while Newmont is plagued by an exodus of key management – some of them now at Barrick. The “New Barrick” team is sufficiently resourced to take on this whale-sized meal.
Addressing the media and analysts yesterday, Bristow spelt out the case for a Barrick-Newmont merger: in addition to unlocking more than S$7 billion in synergies, it would create the world’s largest pool of Tier 1 assets (defined as having a 10 year life with annual production of at least 500 000 ounces in the lower half of the cost curve). It would also generate enough cash flow to drive future growth.
The real prize for Barrick is the ability to tear down fences between it and Newmont in the gold-rich Nevada region, allowing it to rationalise transport fleets and share processing facilities. The Barrick offer was “far superior” to Newmont’s proposed acquisition of Goldcorp, says Bristow, with expected Barrick/Newmont annual synergies 7.5 times larger than the quoted annual synergies for the Newmont/Goldcorp transaction.
The once cordial conversation between Newmont and Barrick has turned red hot. Gary Goldberg, CEO of Newmont Mining, says he was shocked at news of the Barrick offer as both CEOs had previously been in discussions about possible joint ventures and other forms of cooperation. He told Kitco News that he would take Bristow’s offer to his board for consideration, but made no bones about his dislike of the way the deal was hatched and the price being offered: 2.569 Barrick per Newmont share. This makes Barrick the senior partner, with 55.9% of the merged company, with Newmont owning 44.1%.
Asked whether a joint venture rather than a merger between Newmont and Barrick would not be a preferable outcome, Bristow replied that previous talks had broken down when Newmont wanted absolute control without bringing sufficient value to warrant it.
Goldberg stood by the S$10 billion Goldcorp transaction announced last month, which will achieve $2.5 billion in additional value for shareholders. The combined Newmont-Goldcorp’s reserves and resources would be unmatched in the gold sector, with mines located in the Americas (75%), Australia (15%) and Ghana (10%). It plans to offload assets worth up to S$1.5 billion over the next two years to optimise gold production at a sustainable, steady-state level of 6-7 million ounces annually.
In 2017 Newmont produced 5.3 million ounces of gold, against Goldcorp’s 2.6 million ounces. The combined operations will produce a steady 6-7 million ounces for the next decade.
Previous marriage dances have not yielded results. In 2014 merger negotiations broke down over the details and who would end up in control. Goldberg says since then Newmont has added 65% total shareholder returns, while Newmont’s shareholder value declined 22%.
Barrick would emerge the senior player in a merger with Newmont because of its superior list of Tier 1 assets, its exploration potential in the Americas and Africa, and some excellent new finds in the Nevada area of the US – particularly the Goldrush-Fourmile, the group’s newest mine with a possible resource of 9.4 million ounces waiting to be extracted. Further discoveries nearby could mean the group is sitting in a giant ore body of much larger potential.
The merger with Randgold substantially improved Barrick’s average ore grade. Randgold has an average grade of 3.7 grams a ton, against Barrick’s 1.55g/t. A merger with Newmont would likewise lift the latter’s average grade and improve profitability.