According to a report in Britain's Sunday Telegraph newspaper, Denver-based gold producer Newmont Mining is planning a takeover bid for Toronto-based Barrick Gold – in part because a secret five-year standstill agreement is coming to an end. Barrick says that this is nothing but “wild” speculation, but there are plenty of reasons to believe a takeover bid isn't such a wild idea.
One of the main reasons a deal would make sense for Newmont is that Barrick's shares look awfully cheap compared with those of the U.S. producer, something Barrick CEO Greg Wilkins effectively admitted even as he denied the Telegraph story (Newmont had no comment). The Toronto-based company's stock has climbed 32.5 per cent over the past 12 months to about the $23 (U.S.) level , but it is still relatively undervalued next to Newmont and its other peers in the gold mining industry.
For the most part, this stems from Barrick trying to unwind its traditional reliance on gold hedging, whereby the miner effectively sold its future gold production to lock in a favourable price. While that strategy worked brilliantly when gold prices were low, allowing Barrick to make billions more in profit than its unhedged competitors, it penalized the company when gold started to climb – and investors penalized the stock.
Barrick has been trying to unwind its gold hedge “book” as quickly as it possibly can, but it still faces potential losses if gold prices remain high, and the market is discounting the share price as a result. According to a recent analysis by National Bank Financial analyst Tanya Jakusconek, in fact, Barrick's stock price – when valued on a price to net-asset value basis – hasn't been this cheap relative to those of Newmont since about 1991.
Coincidentally enough (or not), 1991 was also the first time the idea of a merger between Newmont and Barrick came up, although it was far from the last. At that time, the idea came from Newmont, then controlled by British investor Sir James Goldsmith - a fitting name for the controlling shareholder of a gold mining company. The two discussed a $2.5-billion (U.S.) merger, but after a few months of talks the proposed deal fell apart.
Some reports said that “cultural differences” between the two kept them from agreeing on a merger – a phrase that in many cases is a euphemism for a dispute over control of the merged entity. According to some observers, Sir James didn't like the idea of giving up his 49-per-cent control stake in Newmont, and Peter Munk – who at the time controlled 21 per cent of Barrick's stock - didn't much like the idea of relinquishing control either.
In the end, the two companies decided to co-operate on their nearby mine properties in Nevada, one of the synergies that had helped fuel the merger idea in the first place. In fact, those types of complementary assets are one the factors that make a combination sensible even now, Ms. Jakusconek says. The two share a similar focus on North and South America, Africa and Australia and their assets in each are similar in size and in some cases location.
After falling apart in 1991, the idea of a Newmont-Barrick combination raised its head again in 1996, this time at Barrick's instigation. At that point, the company's annual output was almost twice that of Newmont's, whereas in 1991 Newmont produced three times what Barrick did. By 1996, the Toronto company had become the world's third-largest producer with output of 3 million ounces a year, thanks in part to its purchase of Lac Minerals. But then Barrick got distracted by a potential asset deal with doomed Bre-X Minerals.
In 1999, both companies were trying to expand their asset bases, in part because the low price of gold made it even more attractive for producers to have economies of scale – that is, to be as big as possible, in order to spread their costs out over a larger base. According to the Sunday Telegraph report, at that point Barrick and Newmont also held talks about a possible combination.
Those talks also apparently failed to reach a conclusion. As with their first merger attempt, the companies eventually settled for an asset swap between their neighbouring properties in Nevada. The British report said the two producers also agreed to a “standstill” agreement, which put a five-year moratorium on takeover bids – a period that the Telegraph says will come to an end in April.
After the 1999 talks (assuming there were any) fell apart, both Barrick and Newmont did their best to grow by other means, primarily through acquisition. By 2002, Newmont had become the world's largest producer with annual output of about 7.5 million ounces, after acquiring Normandy Mining of Australia and Toronto-based Franco-Nevada. Barrick bought Homestake Mining in 2001 and planned an ambitious expansion of its mines in South America and Australia that it said would put it in first place again.
Since then, however, Barrick has been preoccupied with its massive hedge book, and has seen some setbacks at several of its properties. At this point, Barrick's production is around the 6-million-ounce level, while Newmont is still around 7.5 million ounces. The U.S. producer's stock, meanwhile, trades at about 2.2 times its net asset value according to National Bank's figures, while Barrick's stock trades at just 1.5 times.
A Newmont takeover bid for Barrick may be far from a done deal, but wild speculation? Hardly.
