Earlier today, Barrick Gold Corporation (ABX) confirmed that it has reviewed the opportunity to merge with Newmont Mining Corporation (NEM) in an all-share nil premium transaction. The company noted that no decision has been taken at this time.
In December 2018, Barrick completed the US$6 billion acquisition of Randgold, while Newmont earlier this week got approval from the Canadian Competition Bureau to go ahead with its US$10 billion acquisition of Goldcorp (G).
Newmont Goldcorp would be the largest gold miner in the world, producing 7 million to 8 million ounces annually at all-in sustaining costs of more than US$ 900 per ounce. After its acquisition of Randgold, Barrick will produce 4 million to 5 million ounces annually at AISC of roughly US$ 900 per ounce.
“Newmont shares trade roughly in line with our fair value estimate, so if a transaction were to occur, we think Barrick would be paying fair value,” said Morningstar equity analyst Kristoffer Inton, who noted that given the speculative nature of the news so far, he is leaving his fair value estimates unchanged.
The three-star Barrick is trading at a premium, while the three-star Newmont and Goldcorp are both trading at a discount to our fair value estimates. All companies retain their no-moat ratings.
Inton pointed out that this isn’t the first time that a Barrick-Newmont merger was explored. Back in 2014, the companies negotiated a merger, and broke off talks days before the expected announcement, with both companies issuing rarely seen biting press releases that blamed the other for the abandoned transaction.
“The merger strategy has always made some sense. The companies’ overlapping assets in Nevada could realize some synergies through a combination, and the merger could allow the combined company to cherry-pick the best assets out of both portfolios and divest the others. Furthermore, 2014’s Barrick is very different from 2019’s,” Inton said.
Inton said that during talks in 2014, the late founder and then co-chairman Peter Munk was still at Barrick’s helm, and Newmont had cited a media quote from him in its press release after talks fell apart. Today’s Barrick is under different leadership, so cultural differences are a lot less likely to arise than five years ago, he noted.
However, Inton warns that the Newmont-Goldcorp merger presents a new challenge, as given size differences, Barrick would likely need to get Newmont to cancel its acquisition of Goldcorp and pay the US$ 650 million break-up fee. “Attempting to acquire Newmont Goldcorp would leave Barrick as the smaller owner in the combined company, and we would be surprised to see Barrick Chairman John Thornton enter a deal that could threaten his control of the combined company,” Inton said.
