Giant gold deals create giant miners, but divide investors
As Newmont Mining Inc.’s chief executive Gary Goldberg hawked a proposed $10 billion all-stock purchase of Vancouver-based Goldcorp to his investors on Monday, he and his team emphasized massive gold production, a focus on mines in the safest jurisdictions in the world and continued investment in Canada.
That drew a stark contrast to chief rival Barrick Gold, which also recently completed a mega-merger, and has reduced its presence in Canada and grown in more risky jurisdictions.
“This is not a deal we have to do, it’s a deal we want to do,” Goldberg told investors.
But while Barrick’s share price surged after announcing its deal, Newmont’s stock had declined 8.89 per cent to close at US$31.78 on Monday afternoon.
Barrick and Newmont have long competed to be the largest gold producer in the world, and now both have turned to mega-mergers to expand their hulking profiles. But the deals each company struck reveal differences in strategy that are likely to become more apparent as they confront the challenges of continuing to grow while producing millions of ounces of gold per year.
“I can’t see why Newmont did it,” said Ted Hirst, a managing director of investment banking at Cannacord Genuity. “Their strategy has been very sound. I guess what they’re saying now is bigger is linked towards better.”
Press releases about the mergers revealed other differences as well: Colorado-headquartered Newmont emphasized it is targeting production at an unprecedented six to seven million ounces of gold per year for at least a decade, making it the largest company in the world, while also delivering the highest dividend in the industry.
It also announced it is moving its North American regional operations office from Nevada to Vancouver.
In contrast, Toronto-headquartered Barrick just completed a $6 billion purchase of Randgold Resources Inc., which it emphasized created a company with low costs and high cash flows. In announcing the deal, it specifically downplayed any references to its ounce production noting it was focused on free cash flows.
On Monday, a Barrick spokesperson declined to answer questions about its expected production in 2019.
The company has also been conducting layoffs at its corporate headquarters in Toronto, instead advocating for more management at the site of the mines.
Hirst noted the gold industry is still shaking off the hangover from a spate of mergers not quite a decade ago that left many companies carrying heavy debt loads or facing challenges to build or operate new mines. That’s meant risk mitigation is more important than ever and the two companies are taking a different approach.
Newmont has stressed its combination creates a company with mines in stable jurisdictions including about half in Australia, Canada or the U.S., and the rest mainly in Latin America. Meanwhile, Barrick’s purchase of Randgold meant it was acquiring an Africa-centric company with mines in Cote D’Ivoire, the Democratic Republic of Congo and Mali.
But Hirst said he preferred Barrick’s deal because it brought Randgold’s chief executive Mark Bristow to the helm of the company, and he has a track record of successfully operating mines even in politically risky jurisdictions, including the Democratic Republic of Congo.
“They’ve got the right guy in charge,” said Hirst. “I do believe the jockey matters. I think he knows how to go through these companies and reduce costs.”
In contrast, Goldberg, who also has a successful track record of operating mines, has said he plans to leave before the end of the year as part of a succession plan announced in 2018.
Still, views about which company has lower risk vary and some analysts have given the merger positive reviews.
Pierre Lassonde, former president of Newmont and the chairman of the metals streaming company Franco-Nevada Corp., has been critical of Barrick for reducing its presence in Canada including through layoffs and board turnover.
Lassonde agreed that leadership is key but noted Goldberg’s replacement Tom Palmer, the chief operating officer, hailed from a mining background and said he prefers Newmont’s risk profile and approach.
“They end up paying a dividend that is better than Barrick-Randgold, plus they’re in locations that are superior,” said Lassonde, who said he is not invested in any of the companies.
But views about the deal were mixed. The Shareholders’ Gold Council issued a statement expressing “disappointment” because the sale occurs when Goldcorp’s stock trades near at a 10-year low. And it noted the company’s chief executive David Garofalo stands to receive as much as US$11 million in compensation if the deal is approved.
“The merger with Newmont is only a victory for shareholders in as much as it eliminates another gold company with executive incentives that are grossly misaligned,” it said in a statement.
It’s like musical chairs. You want to look around for the absolute best partner you can get.Goldcorp chairman Ian Telfer
Still, the merger suggests the gold sector is slowly plodding toward consolidation as many executives and bankers for months have been predicting would happen.
Ian Telfer, chairman of Goldcorp, said in an interview with the Financial Post on Thursday that investors who want exposure to gold are looking to invest in just a few companies and that means consolidation is likely to continue.
“It’s like musical chairs,” said Telfer, “You want to look around for the absolute best partner you can get.”
He said both Goldcorp and Newmont shared similar philosophies when it comes to safety culture, geopolitical risk and operating with social licence. It was a view echoed by Goldberg in announcing the merger, who also added that the combined company would honour Goldcorp’s agreements made with First Nations communities in Canada.
But the consolidation comes as many gold company executives, including Goldcorp CEO David Garofalo, have spoken about the challenges of replenishing the pipeline when production exceeds more than a couple million ounces of gold per year.
Telfer said one of Newmont’s attractions to Goldcorp is that it is developing several polymetallic deposits, such as copper-gold. Those projects require large capital expenditures to construct but typically last much longer than pure gold deposits, and a company as large as Newmont Goldcorp may have the size to handle those large capital expenditures, he said.
“We think that is the future,” said Telfer. “The lives of gold mines are typically much shorter than copper-gold mines, so that’s the attraction for both companies.”
Published at Mon, 14 Jan 2019 23:44:02 +0000