Barrick's Bid for Newmont Faces Challenges

Barrick Gold GOLD formally announced an unsolicited bid for Newmont Mining NEM on Feb. 25. The all-share offer contained no premium at an exchange rate of 2.5694 Barrick shares for each Newmont share. At Barrick’s share price at the time of the announcement, the offer price was roughly $32 per share compared with our $38 fair value estimate for Newmont but roughly within fair value range because of our very high uncertainty rating.

A potential Barrick-Newmont combination is compelling, given Barrick’s estimate of over $7 billion in synergies on a net present value basis. Barrick management said most of these synergies would occur in overlapping Nevada assets.

Newmont management has countered Barrick’s proposal with two major arguments. First, massive synergies could be realized through a joint venture of the assets in the region rather than an all-out acquisition. Second, even though it includes market reaction to the rumored merger, the exchange rate now implies a negative premium for Newmont shareholders. Newmont shares rose after rumors of the Barrick bid surfaced, which suggests the market thinks a higher offer will come. Another major challenge is the $650 million breakup fee Newmont would have to pay Goldcorp GG to cancel their own merger in favor of the Barrick proposal.

The potential value that could be unlocked from the combination of Newmont and Barrick assets is hard to argue with, as there is redundant overhead that could be eliminated and operational efficiencies unlocked, given the proximity of the very large, prolific mines. However, Newmont shareholders may want to see these synergies through an offer price premium. On the other hand, investors could be more willing to forgo a premium if they are shareholders of both Barrick and Newmont.

Barrick’s proposed acquisition is complicated by Newmont’s ongoing acquisition of Goldcorp, which is currently expected to be completed in the second quarter. Newmont Goldcorp would be the largest gold miner in the world, producing 7 million-8 million ounces annually at all-in sustaining costs of more than $900 per ounce. After its recent acquisition of Randgold, Barrick will produce 4 million-5 million ounces annually at AISC of roughly $900 per ounce. Given the size difference, Barrick would probably need to get Newmont to cancel its acquisition of Goldcorp and pay the $650 million breakup 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.

This isn’t the first time that a Barrick-Newmont merger has been explored. The last attempt was in 2014, when talks broke off 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, Barrick is very different now. In 2014, the late founder and then-cochairman 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.

Given Newmont’s resistance thus far and uncertainty on what the ultimate outcome may be, we’re leaving our fair value estimates unchanged. Our Barrick fair value estimates remain at $12 and CAD 16 per share. Our Newmont fair value estimate of $38 per share and Goldcorp fair value estimates of $11 and CAD 14.50 per share are intact as well. All companies retain their no-moat ratings. We assume the Newmont-Goldcorp merger will close as announced. We would revisit our fair value estimates if Newmont shareholders appear favorable to the deal in the coming weeks. Given that Barrick’s offer price is roughly at Newmont’s fair value, we’d anticipate only a change to Goldcorp’s fair value.