Three years ago the merger of Barrick Gold Corp. and Newmont Mining Corp. would have created a bullion behemoth worth marvelling over.
Today the proposed combination looks more like two wounded warriors working together to find the helicopter that will airlift them out of battle.
Barrick's woes have been analyzed to death here in Canada. The gold giant had too much debt, too many far-flung assets, and too many capital expenditures to withstand a sudden gold price correction.
Newmont, based in Colorado, is in almost the exact same boat.
Although the miner isn't burdened by the same $12-billion (U.S.) debt load as Barrick, it still had roughly $7-billion in debt outstanding at the end of the 2013 fiscal year, prompting rating agency Standard & Poor's to downgrade the company in November to triple-B, from triple-B-plus, and rating agency Moody's Investors Service to put Newmont under review for a downgrade in January.
The American miner, which generates 90 per cent of its revenue from gold production, also had its fingers in too many pies, forcing management to start selling off scores of non-core assets. Last year these sales amounted to roughly $600-million, and recent deals include sales of stakes in Canadian Oil Sands Ltd. and Paladin Energy.
Then there is capital spending, which is being scaled back across the entire mining industry. Newmont stripped out roughly $1-billion in expenditures last year, and intends to slash another $600– to $700-million over the next three years. Now you can see why the cost synergies from any Barrick-Newmont tie-up would be so lucrative. The miner has already slashed to the bone, and is looking for any possible way to eke out more savings.
Because of its woes, Newmont's shares have fallen by two-thirds from their peak in late 2011. But the miner does have some saving graces.
Rather than spending heavily on acquisitions during the latest mining supercycle –when Barrick paid $7.3-billion in cash to buy Equinox Minerals – Newmont kept a lower profile, buying Vancouver's Fronteer Gold for $2.3-billion (Canadian).
Most of Newmont's big debt repayments are also at least five years into the future, so the company doesn't expect a big cash crunch any time soon. Plus, management predicts a stable production profile of roughly five million ounces for the new three years, which helps them estimate cash flows – assuming they can correctly predict where gold prices will move.
However, even with these benefits, management knows that sitting idly is troublesome, which is why they're putting pretty much every option on the table. Newmont recently revised its dividend policy and narrowed its development focus on key assets such as the Merian project in Suriname, and its latest idea, of course, is contemplating the merger with Barrick.
Still, there is one action management seems to abhor. Unlike Barrick, Newmont has refused to raise equity to pay back debt.
"We do not believe that issuing equity to pay off debt is a sound business practice, and we have no intention to do so," chief executive officer Gary Goldberg said on a conference call in February.
Barrick and Newmont at a glance
2013 revenue: $8.3-billion (U.S.)
2013 asset writedowns: $4.4-billion 2013 adjusted net income: $700-million, or $1.40 per share
2013 revenue: $12.5-billion 2013 after-tax impairment charges: $12.7-billion 2013 adjusted net income: $410-million, or 37 cents per share