Many people have described Barrick Gold Corp.’s hostile takeover offer for Newmont Mining Corp. as audacious. A better word might be “unnecessary.”
Unnecessary, that is, from an investor’s perspective. A successful bid would no doubt do wonders for the compensation of Barrick executives, who would wind up running the biggest gold company in the world by far. However, a tie-up between Barrick and Newmont would do relatively little for gold lovers, who can already target all the precious-metals exposure they want through other channels.
How exactly? If you’re someone who likes the long-term economic case for gold, you can invest in an exchange-traded fund (ETF) such as the SPDR Gold Shares Fund, which holds physical gold. You get a pure play on the precious metal, with all the messy uncertainties of investing in a mine operator stripped away.
Prefer to bet on gold production instead? Then load up on one of the streaming companies, such as Wheaton Precious Metals Corp. or Franco-Nevada Corp., that have negotiated rights to continuing flows of mine output from diversified portfolios of producers.
Want to own a direct stake in a broad mix of gold mines? Then put your money into an ETF such as the iShares MSCI Global Gold Miners ETF, that holds a basket of the world’s major producers.
All of these options look like reasonable alternatives to making a big gamble on one giant miner, with all the management and operational risks that inevitably go along with investing in a single company. If you recall Barrick’s disastrous foray into copper mining at the peak of the last mining cycle in 2011, when it acquired Equinox Minerals Ltd., you can appreciate the merits of not betting everything on the judgment of a single executive team.
To be sure, a combined Barrick-Newmont would tower over the rest of the sector. It would define Big Gold. But history shows that Big Gold doesn’t always produce big results.
Over the past five years, the two North American giants, Newmont and Barrick, have gone in opposite directions, with Newmont producing a total return of 81.6 per cent (in Canadian dollars) and Barrick saddling its shareholders with an 18-per-cent loss. But even Newmont hasn’t matched the payoff of some smaller miners, such as Kirkland Lake Gold Ltd., Wesdome Gold Mines Ltd. and Endeavour Mining Corp.
As these examples demonstrate, the size of a gold producer has only a limited amount to do it with its investment appeal. Once a miner reaches a certain volume, becoming even bigger by acquiring other mines doesn’t automatically reduce its risk or improve returns. What does matter to a company’s bottom line is its ability to produce gold at the lowest possible cost, and that usually has more to do with the geology of its mines than its corporate scale.
To be fair, there are exceptions. Barrick’s case to Newmont investors rests on its assumption that it can save billions of dollars by combining the two companies’ operations in Nevada. This may be so, but questions abound.
If the potential savings are so large and certain, why isn’t Barrick offering a premium to Newmont shareholders to persuade them to do the deal? And why don’t the two companies simply set up a joint venture to harvest the apparent synergies instead of merging all their operations? One hurdle seems to be that neither company trusts the other. That has to make investors wonder how many of those supposed synergies would survive a messy takeover.
An even deeper question is whether building a gigantic gold miner still makes sense. A couple of decades ago, investors had limited ways to invest in precious metals and therefore had a clear rationale for preferring a big gold producer. A company that owned several mines in several different regions offered a simple, useful way to diversify one’s holdings.
Today, that doesn’t make as much sense. Anyone who wants exposure to a diversified set of mines can just buy an ETF or invest in a streaming company. Oddly enough, the gold industry seems to be consumed by the desire to build bigger and bigger producers at the same time as the rationale for that size is diminishing.