Barrick launches hostile bid for Newmont

A merger of Newmont Mining (NYSE: NEM) and Barrick Gold (TSX: ABX; NYSE: GOLD) would create over US$7 billion in real synergies, with more than half of them stemming from Nevada, where the two companies have complementary assets, Barrick president and CEO Mark Bristow declared late February, as part of the “industrial logic” behind Barrick’s launch of a hostile takeover bid.

“There have been many unsuccessful attempts over the years to forge such a merger and the reason for not doing it escapes me, because this opportunity has strategic and financial rationale, and is obvious and compelling,” he told analysts and investors on a conference call, soon after Barrick announced the bid for its U.S. rival.

Barrick’s all-share proposal to combine the two companies in an at-market deal that equates to 2.5694 of its shares for each Newmont share would give Barrick shareholders 55.9% of the merged company, and Newmont shareholders, 44.1%.

“There is no other transaction in our industry that can create better value for shareholders and other stakeholders,” Barrick executive chairman John Thornton and Bristow wrote in a joint letter to Newmont’s board of directors, which Barrick released to the public.

The executives described the proposed business combination as a “unique, once-in-a-lifetime opportunity to create the unrivalled leader in the gold sector and generate significant — and in our industry, unparalleled — value creation.”

The main condition of Barrick’s no-premium offer is that Newmont abandon an agreement it reached in January to combine with Goldcorp (TSX: G; NYSE: GG) in an all-stock-transaction valued at $10 billion.

“We as a team can’t wait until after Newmont and Goldcorp merge, because we don’t want Goldcorp’s lower-quality assets in our portfolio,” Bristow noted on the Feb. 25 analyst call, adding that “paying a 17% premium for Goldcorp with its second-tier assets and no synergies, followed almost immediately by the departure of Newmont’s CEO, strikes me as both desperate and bizarre.”

Earlier this year, Newmont announced a long-term succession plan under which its CEO, Gary Goldberg, will be replaced in the fourth quarter of 2019 by the company’s current president and chief operating officer, Tom Palmer.

In remarks to Bloomberg on the sidelines of BMO’s annual Global Metals and Mining conference in Florida, Goldberg described Barrick’s takeover attempt as a “desperate” and “bizarre” move, and noted during his corporate presentation that Newmont had “delivered vastly superior performance over Barrick during the last five years.”

“Our team has a proven track record of successfully managing and operating a global mining portfolio, delivering total shareholder returns of 65% since January of 2014, compared with Randgold’s anemic 9% and Barrick’s shocking negative 22% over that same period,” the Colorado-based executive said.

Goldberg noted that the current management team at Barrick “has only been together for eight weeks and has never collectively managed to the global portfolio of our scale, complexity or quality. We have delivered, they simply, have not.”

The mining executive also pointed out that over the last half decade, Newmont had evaluated acquisitions of both Barrick and Randgold, and “neither met our risk or return requirements.”

“Both the Barrick and the Randgold portfolios present unacceptable risk and are in unfavourable jurisdictions,” Goldberg said. “We agree with Barrick’s position that jointly operating our collective assets in Nevada represents a compelling value opportunity for all of our shareholders, but there is no reason to bear the risk from Barrick’s other assets.

“We’re hopeful that Mark and his team would take a practical and constructive approach to unlocking value in Nevada, and doing that with us,” he continued. “Instead, they appear to be pursuing the same hostile and value-destructive tactics that their executive chairman has pursued since arriving at Barrick.”

By contrast, he continued, Newmont has a “much more effective and efficient proposal.

“We have been, and remain, prepared to immediately begin constructive discussions with Barrick’s team in Nevada to create a world-class joint venture there. Unfortunately, Mark’s claim … that he has shared all of this with Newmont to no avail, is simply not true,” Goldberg said.

Turning to Newmont’s proposed acquisition of Goldcorp, Goldberg noted that once combined, the larger company would operate a world-class portfolio of assets in four continents, “target sustainable and profitable gold production of between 6 million and 7 million oz. per year,” and “expect to enhance annual revenues by another US$1.5 billion through silver, zinc and copper production.” Newmont-Goldcorp would also boast “the gold sector’s best project and exploration pipelines, in terms of quality and depth.”

“Taken together, our assets will establish Newmont-Goldcorp as the world’s leading gold producer, with 90% of our reserves based in the Americas and Australia,” Goldberg said. “Combining with Goldcorp gives us the world’s largest gold reserve and resource base, and the highest reserves per share in the gold sector.”

As for synergies, he pointed out, the deal would generate US$100 million in annual pre-tax synergies through general and administrative (G&A) savings, and a streamlined supply chain, as well as achieve another US$165 million in annual improvements at Goldcorp’s operations. “Taken together — US$265 million — these efforts hold the potential to deliver more than US$2.5 billion in total value creation.”

Goldberg also highlighted Newmont’s successes in transforming its business over the last six years. These include generating US$2.8 billion by monetizing non-core assets, fine-tuning its operations and “realizing more than US$2 billion in cost and efficiency improvements.” The company has continued to invest in exploration across the cycle, he said, while only advancing projects that meet its minimum hurdle rate of 15% at a US$1,200 per oz. gold price. In addition, since 2013, Newmont has cut net debt 83% to less than US$900 million, and in 2018 returned US$400 million to shareholders.

The Newmont-Goldcorp transaction was to have closed next  quarter after a special shareholder meeting in April and the receipt of regulatory approvals, Goldberg said.

A merger between Barrick and Newmont would close in the third quarter, Bristow said, assuming Newmont ends the stock-for-stock transaction it agreed to with Goldcorp in January valued at $10 billion. If it did so, Newmont would have to pay a break-fee of US$650 million — 3.5% of its equity value.

Bristow pointed out that the US$7 billion in (pre-tax) net present value synergies shared with all shareholders at its multiple means that Barrick is, “in fact, offering Newmont more than US$41 a share in value — so the synergies are clearly the premium.” (Shares of Newmont closed at US$34.68 per share on Friday, Feb. 23 — the last trading day before the takeover bid was announced on Feb. 25.)

In addition, Barrick-Newmont would have a portfolio of eight tier-one assets and would “create another one or two,” Bristow said. The merger would offer shareholders “significant re-rating potential due to its superior asset base,” the “highest levels of free cash flow,” and a “management team with a long record of delivery.”

Synergies would also come from running the corporation “as a modern mining business should be run — by flattening the corporate structures, focusing our exploration efforts on the most prospective target areas and integrating our supply chains.”

But Nevada “is the crux of our proposal,” Bristow said, because that’s where most synergies would come from.

“Barrick has the bulk of the high-grade reserves and Newmont owns key processing plants,” he said. Rationalizing these would “reduce operating costs, increase free cash flow and reduce cut-off grades, which would increase reserves and resources, extending not only the lives of the mines, but also their profitability.”

While the two companies have similar levels of reserves and resources in Nevada, he said, the grade of Barrick reserves is nearly three times higher than Newmont’s, and the grade of Barrick’s resources is even higher.

“Newmont’s reserve grade is only around 1.6 grams a tonne and their resources are even less than that, and so the pro forma company would not only deliver increased production at a higher grade, but also make more efficient use of all of the processing facilities in Nevada.”

“Newmont has not spent any capital of substance in Nevada for a very long time,” he continued, “whereas Barrick is fully committed to unlocking the value that its geologists have delivered in Nevada,” and “now we have a real management team that understands the opportunity.”

He added that “the combination will enable us to consider the whole of Nevada as effectively one orebody, which will result in better mine planning and ensure that the state’s enormous geological potential can be realized for all stakeholders. Incidentally, I’ve shared all of this with Newmont already, but to no avail.”

Areas Barrick would optimize in the gold-mining state would include moving ore to the process plants or the plants that provide the best recoveries for each ore type. There would also be savings in procurement and logistics.

Other means of cost-savings would involve G&A; eliminating regional businesses and duplicated supply chains, and also shared mining fleets; the balance between owner-miner and contract-miners; the replacement and rotation and optimization of the fleets, as some of the pits come to an end and new ones are started; and maintenance and planning.

“The synergies between Goldstrike and Carlin are very real,” he said. “There’s ore transported right across Nevada, when the Goldstrike roaster is sitting a few miles away from the Carlin complex. And of course, you know, the Turquoise Ridge-Twin Creek joint-venture, where Newmont has 25% of Turquoise Ridge but is basically throttling the Turquoise Ridge value because of its high toll-treating contract, which it forced, actually, last year, in the revised TMA, and that has effectively added two grams to the cut-off grade of Turquoise Ridge.

“And I’ve had these conversations, by the way, with Newmont, and it makes no sense to me because we’re leaving high-grade ore underground, because we have to try and deliver a profitable business to our joint-venture partners — being Barrick and Newmont — and so putting those two assets together makes eminent sense and unlocks a larger net present value that benefits both shareholders.”

During a question-and-answer session, Bristow noted that what is “intriguing about this proposal is that it’s actually quite simple — it’s not a complex proposal.”

He also argued that “in fact, Newmont’s “real growth is in Africa,” where it already owns two gold mines in Ghana (Akyem and Ahafo). “One thing that no one can argue about is we’ve got the real experience in Africa — we know how to operate in Africa and we can assimilate that part of the portfolio in a heartbeat.”

Bristow added that he and his team had a history of looking at opportunities in Ghana, “and so right out of the blocks, this delivers real value for both sets of shareholders, and this is not a win or lose opportunity.”

Referring to Randgold’s track record on corporate social responsibility, he also said it would help a Barrick-Newmont combination in regions such as Peru. “Our ability to manage social licence is a critical component and is required to deal with a very large liability embedded in Newmont, in the form of Newmont’s Peruvian operations,” he said. “As you know, there’s a long history there around social licence, and apart from tangible deliverables, which are important to us, there are many other opportunities to create value in this bigger portfolio.”

When asked why Barrick didn’t offer Newmont shareholders a premium, Bristow said: “I’ve never seen a premium as high as this ever offered in the industry — if you take the US$7 billion in synergies we’re offering, that’s a premium in itself.”

Bristow also reiterated that conversations with Newmont “going into the finals of the Barrick-Randgold deal” went nowhere.

“Barrick had a number of conversations with Newmont on various options — whether it was a full combination, or a unification of Nevada, or anything in between,” Bristow said. “The position of Newmont at the time was that they wanted to have management control and 50%, and very clearly, as you know, Newmont has a lot lower asset quality in Nevada than Barrick’s portfolio, and so it didn’t make sense.”

The last time the two companies discussed a merger in public was in early 2014.