Wrestle mania: inside the Goldcorp-Newmont-Barrick mega deal

Heidi Vella 2 April 2019 (Last Updated April 2nd, 2019 09:13)

As Newmont Mining continues to proceed with its $10bn takeover deal of gold-miner Goldcorp, in a shock move, rival Barrick Gold instigated a hostile $18bn takeover bid of Newmont. Heidi Vella takes a look at the potential combinations and their possible impact on the North American gold mining sector.

Wrestle mania: inside the Goldcorp-Newmont-Barrick mega deal
Newmont Goldcorp’s combined companies plan to target $1-1.5bn in divestitures over the next two years to optimise gold production to – six to seven million ounces (moz) annually. Credit: Courtesy of James St. John

As 2019 kicked-off, Colorado-based Newmont and Canadian-based Goldcorp announced the two companies had struck a deal to merge, in a move that would see them become one of the biggest mining firms in the world. The following month, the firms’ consolidation overcame its first hurdle after it was approved by both Canadian and Korean regulators.

However, in a surprise move in February, Newmont received an acquisition proposal from Canadian-based mining behemoth Barrick – one of the largest gold mining companies in the world.

After receiving an initial rebuttal from Newmont, Barrick, which already owns a thousand shares in Newmont, said it is considering making an all-stock bid for the company. If successful the deal would create a gold company with a staggering value around $42bn.

A tale of two mergers

During a conference call with journalists shortly after Barrick announced its intentions regarding Newmont, the company’s CEO, Mark Bristow, said he sees the potential merger as an opportunity with ‘strategic and economic rational [that] is so obvious and compelling’.

Bristow, in a letter to shareholders, claims that merging with Newmont would create up to $7bn in ‘synergies’, primarily through cost savings, as both companies have operations in Nevada –  Newmont has 19 mines in the state, many adjacent to Barrick’s own operations.

“Considered globally, the merger represents a radical and long-overdue restructuring of the gold industry, and a transformative shift from short-term survival tactics to the long-term creation of sustainable value,” Bristow said.

Barrick, which only a few months ago acquired London-listed rival Randgold, effectively created a three-way fight among some of the world’s top miners. Newmont’s merger with the company is contingent on it abandoning its consolidation with Goldcorp, which could leave the latter stranded.

On 3 March, however, Newmont’s board unanimously rejected Barrick’s proposal, saying it would reduce, rather than enhance, shareholder value. It also noted Barrick’s “at market” proposal is at a “material discount to current market values.”

In an earlier press release, the company had said Barrick was “ignoring risk and overstating the rewards.”  Barrick’s risk and return profile it said, is “inferior on many fronts,” including a “comparatively ineffective operating model, poor track record on delivering shareholder returns and unfavourable jurisdictional risk.”

Goldcorp-Newmont merger potential

Newmont has instead decided to forge ahead with its planned merger with Goldcorp, which it said represents potential “value creation of more than $2.5 billion” and the best value for shareholders.

Newmont Goldcorp’s Reserves and Resources – the new company’s name – will be one of the largest in the gold sector, with assets in the Americas, Australia and Ghana. The combined companies plan to target $1-1.5bn in divestitures over the next two years to optimise gold production to – six to seven million ounces (moz) annually.

GoldCorp says it expects to generate up to $100m in annual pre-tax synergies, with additional cost and efficiency opportunities pursued through its ‘Full Potential continuous improvement program.’

Writing for Seeking Alpha, Victor Dergunov, founder of Albright Investment Group and active investor and entrepreneur notes, that if gold prices continue to rise, Goldcorp’s operations should begin to produce substantially more revenues and profits. This indicates that the $10bn paid for the company “will likely prove to be quite cheap down the line.”

He also notes that coming under Newmont’s management should make Goldcorp much more efficient, as the company has been in “perpetual decline since the highs of 2011.”Key to the Goldcorp-Newmont merger is that both companies have assets in stable regions, whereas Barrick has riskier investments. GoldCorp and Newmont have assets in Australia, Canada, the US, and Latin America. While Barrick, through Randgold, has a risker Africa-centric portfolio, with mines in Cote D’Ivoire, the Democratic Republic of Congo and Mali.

Barrick-Newmont takeover potential

However, in a letter signed by Newmont Chair Noreen Doyle and CEO Gary Goldberg, it noted the potential “value-creation opportunities available in Nevada” if Newmont decided to work with Barrick through a joint venture partnership.

A joint venture, it said, would combine the companies’ Nevada operations and create value for both sets of stockholders.

In the end, Barrick’s takeover bid for Newmont appears to have failed.Instead, the two companies on 3  March, announced they have opted to forge what Newmont calls a “historic joint venture designed to unlock $5bn in synergies.”

The deal will effectively create the world’s biggest producer of gold with around 4.1mozof gold produced every year. The joint venture will combine their respective mining operations, assets and reserves in Nevada, allowing the companies to capture an estimated $500m “in average annual pre-tax synergies in the first five full years of the combination.”/ This is projected to total $5bn pre-tax net present value over a 20-year period.

Barrick will take 61.5 % of the revenues from the joint venture and control of the Nevada mines and infrastructure.

What will the impact be on the gold sector?

But what does Newmont’s two new deals – with Goldcorp and Barrick – really mean for the North American gold mining sector?

“The “synergies” worth $500m that Bristow has talked about are, of course, costs savings through redundancies and closures,” says Jonathan Brooks, partner and head of mining and metals at FieldFisher.

Furthermore, Brooks notes that the mayor of one of the Nevada communities where both Barrick and Newmont operate has said the companies’ merger could potentially remove competition between the two. This could lead to wage squeezes and reduced margins for employees and suppliers.

Similarly, Newmont and Goldcorp have said they will sell $1.5bn of assets, which will possibly include several of Goldcorp’s Canadian mines, including its head office there, as well as some of its South American assets.

“There are fears in Canada the merger will lead to a hollowing out of high-level strategic mining jobs in the country,” says Brooks.

How the two combinations – Barrick-Newmont’s joint venture and the Newmont-Goldcorp merger – will play out for both shareholder value creation and gold mining jobs remains to be seen. But both show that the merger mania sweeping the gold mining sector is here to stay for the foreseeable future, lest companies risk shrinking and losing out.