Barrick Gold Corp. says its strategy is no longer about bigger, but about better. A successful merger with Newmont Mining Corp. has got to be about a bit of both.
Barrick is not talking yet, as no deal is done, but job one when a transaction is finalized will be to explain just how a combination with Newmont would square with Barrick's new strategy.
Toronto-based Barrick has long sought to gain control of Newmont. Talks have gone on and off for more than decade as Barrick grew to become the world's largest gold producer.
Newmont plus Barrick would create by a huge margin the world's largest gold miner. There was a time when that would have been sufficient rationale for Barrick, but that is no longer good enough. Shareholders want returns and cash flow from their mines. They want profit from mining companies, not just growth.
Barrick has shifted its strategy to reflect that. It is a company whose production is markedly lower than in past years because of its willingness to pare assets that were seen to be holding the company back.
From the outside looking in, there are signs that this transaction, too, may herald a different kind of Barrick.
Barrick founder Peter Munk has acknowledged that one of the company's issues has been hubris. In the past, Barrick has been an apex predator in the mining ecosystem. It would pay up and employ hostile bids to ensure it got what it wanted. It got Placer Dome Inc. by going hostile. It got Equinox Minerals Ltd. by blowing other bids away with a topping offer in a frothy market.
This appears to be a more restrained Barrick.
The two miners are in talks for a transaction that would see Toronto-based Barrick buy smaller Newmont in an all-stock deal valued at about $13-billion (U.S.). That would represent a premium of about 13 per cent.
Yet, to ease the way to a friendly transaction, there would be concessions from Barrick such as an almost-balanced board and the chief executive officer title going to the head of Newmont. Newmont's headquarters in suburban Denver will remain as an operating base for the companies' nearby mines in Nevada. As Barrick is much larger, those are significant gives.
And yes, Barrick would end up larger, but after a spinoff of some of the companies' mines in Australia and Asia, not so much as at first look. What will be left will be the assets where the combined companies can bring down costs the most – their Nevada mines that can benefit most from cost-sharing. There are said to be as much as $1-billion a year in cost savings available. Some less profitable mines that are not spun off could be sold.
Still, it is asking a lot of shareholders. Barrick just came off a huge equity sale that boosted its share count by about 16 per cent to 1.16 billion. This transaction as contemplated would push the share count close to two billion. That's a lot of dilution in a few short months. Newmont also brings significant debt, meaning the combined company will have to put debt repayment ahead of more shareholder friendly actions such as stock buybacks and dividends.
Barrick will need to explain, and quickly, how much those cost savings and spinoffs will cut the production costs of the Newmont assets that remain in the combined company. At the moment, it appears that buying Newmont would raise Barrick's all-in sustaining cash costs – not something investors would love to see in an uncertain environment for gold prices.
In Barrick's last large transaction, the communications were very wanting. The company had been signalling to shareholders it wanted to de-emphasize its African gold holdings, and that the company's interest in copper was largely limited to what came out of gold deposits.
Then it jumped in at the last minute of an already giddy bidding war to pay $7.3-billion (Canadian) for Equinox, a copper producer with a big deposit in Africa. For a time, even as analysts and shareholders revolted as the company veered off strategy, it wasn't clear that Barrick realized where it had gone wrong.
That can't happen again. A more humble Barrick will know that.