Barrick’s US$18 B Newmont bid leaves Goldcorp out in cold

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A Newmont Mining gold pour in Nevada. Source: Newmont Mining Corp.

Barrick Gold Corp. [ABX-TSX, NYSE] has launched a US$18 billion hostile bid to acquire U.S. rival Newmont Mining Corp. [NEM-NYSE] in an all share transaction that would create the world’s largest gold producer.

The combined company would have a market cap of $42 billion. It would produce 10 million ounces of gold annual at an all-in-sustaining cost of under US$900 an ounce and hold reserves of over 140.5 million ounces.

The merger proposal was announced Monday February 25 as Newmont works to complete a friendly merger with that Goldcorp. [G-TSX, NYSE-GG] that was announced on January 14, 2019.

If the Newmont bid for Goldcorp succeeds, the combined company, called Newmont Gold would rank as the largest producer globally by some distance with output of between 6.0 million and 7.0 million ounces of gold annually.

On Monday, Newmont said it has received the proposal from Barrick, which is conditional on Newmont dropping its proposed combination with Goldcorp.

Newmont said its proposed combination with Goldcorp represents the best opportunity to create optimal value for Newmont shareholders and other stakeholders.

Investors reacted to the news of the Barrick offer by sending Newmont shares down 0.30% or 11 cents to US$36.37. The shares trade in a 52-week range of US$41.98 and US$29.06.

On the Toronto Stock Exchange, Barrick Gold shares were off 1.58% or 27 cents to $16.86. The 52-week range is $18.90 and $12.54.

The Barrick hostile bid is at a market exchange ratio of 2.5694 Barrick shares for each Newmont share and would offer a far superior value to Newmont’s proposed acquisition of Goldcorp, Barrick said in a press release.

Barrick President and CEO Mark Bristow said the proposed merger is expected to unlock more than $7 billion net present value (pre-tax) of real synergies. A major portion of that is generated by combining the two companies’ highly complementary assets in Nevada, including Barrick’s significant mineral endowments and Newmont’s processing plants and infrastructure.

“The combination of Barrick and Newmont will create what is clearly the world’s best gold company, with the largest portfolio of tier one gold assets and highest level of free cash flow to drive future growth and support sustainable shareholder returns, run by a management team with an unparalleled record for delivering value,” Bristow said.

“Most important, it will enable us to consider our Nevada assets as one complex, which will result in better mine planning and fully realize the state’s enormous geological potential for all stakeholders,” he said.

Whether or not the latest offer will succeed depends on a number of key factors, according to Scotiabank analyst Tanya Jakusconek. They include:

  • The magnitude of potential synergies, particularly relative to the $650 million Newmont-Goldcorp break fee.
  • How those benefits should be split (ie the premium offered).
  • The merged company structure. For example, the composition of senior management/board, organization/legal structure, head office location etc.

“Barrick and Newmont have come to the table to discuss a possible merger, on and off, over the past three decades; the last known instance was in 2014,” Scotiabank said in a report. “These proposed mergers have not been consummated in the past due to either valuation/price, people (senior management structure) or other qualitative factors (ie head office location,” Scotiabank said.

Newmont’s bid to merge with Goldcorp was announced at the tail end of what had been a steep decline in the value of Goldcorp’s shares from $54 in 2011.

Back in October, 2018, Goldcorp lost almost one-fifth of its market value in a single day after reporting weaker than expected production numbers, rising costs and declining reserves.

On Monday, Goldcorp shares advanced 0.68% or 10 cents to $14.70.

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