Toronto-based Barrick Gold Corp. executives used to claim that unlike other companies in the precious metals industry, they would never make acquisitions to grow their footprint and size.
But on Monday after proposing a nearly $18-billion takeover of Colorado-based Newmont Mining Corp. — a deal that if consummated would create the world’s largest gold producer, with an estimated $42-billion market cap, by a distance — Barrick chief executive Mark Bristow acknowledged that being large is critical.
“The point is we really want to attract generalists back into the industry,” Bristow said on the conference call with investors. “We want to be relevant and we think that $40 billion is relevant.”
That’s receiving less attention as Bristow stresses the main rationales for the combination are an estimated $7 billion in cost savings, and putting many of the best mines in the world under his management.
Still, he did say that turning two roughly $20-billion companies into a single $40-billion company also forms part of the rationale for the combination. A larger company is more likely to appeal to investors who have fled the beaten down, high-risk gold sector — which after years of poor returns is primarily a domain inhabited by specialist investors.
“As we stand here today, we’re much more relevant than we were independently,” said Bristow during the conference call Monday.
He stopped short of saying bigger is always better, adding that it makes sense in this case because of his track record of “being disciplined” as a manager.
“Whilst we will be the biggest, more importantly, we would be the most valuable,” Bristow said.
Some analysts are skeptical of the estimated synergies and cost savings outlined by Barrick.
Carey MacRury, an analyst at Cannacord Genuity, wrote in a note to clients that the synergies as estimated by Bristow, including an estimated US$500 million in Nevada, where both companies operate mines, “appears high.”
“If there are significant synergies to be realized in Nevada, we believe that an operating (joint venture) between Newmont and Barrick should be able to provide most or all of the benefits without a full-blown acquisition,” MacRury wrote.
Gary Goldberg, chief executive of Newmont, is calling for such a joint venture, saying back in December he proposed a sit-down with Bristow to work out the details.
Goldberg told the Financial Post he is also thinking about size, albeit in different ways.
He questioned how Bristow, who only joined Barrick in January, after his company Randgold Resources Inc. was acquired for US$6 billion, could possibly manage all of Newmont’s portfolio in addition to Barrick’s newly enlarged portfolio.
“These guys just finished making an acquisition and are just starting the integration,” said Goldberg. “How in the world do they think they can do something on a much grander scale and think they can pull it off?”
Bristow and his team may have built mines in Africa — Randgold had four mines there — but Barrick or Newmont are far larger companies, each with many more mines scattered around the globe, he said in a phone interview from Hollywood, Florida where the BMO Metals and Mining Conference has put him in close contact with investors and other industry executives, including Bristow.
Meanwhile, his company is pursuing a $10-billion acquisition of Vancouver-based Goldcorp Inc. Although it would vault his company ahead of Barrick in terms of gold production, and firmly into position as the largest and most valuable gold producer, Goldberg said it was not about size.
Instead, he said it was driven by his management’s ability to “unlock value” from Goldcorp’s assets and create a portfolio of assets in which 90 per cent of the production comes from the Americas or Australia — considered more politically stable jurisdictions than many parts of the world.
Whether Newmont combines with Goldcorp or Barrick is unlikely to resolve immediately: As it stands, Barrick has made an offer, which proposes a trade of 2.5694 Barrick shares for each Newmont share.
Now Newmont’s board must respond and if it rejects the offer, Barrick could appeal directly to Newmont’s shareholders. While that plays out, the proposed combination of Newmont and Goldcorp continues to move towards its April vote by the latter’s shareholders.
The three companies have significant overlap in their shareholders, so it may come down to views about management, estimates of cost synergies and what will attract generalist investors back into the precious metals space.
Size, however, plays a critical role in the process.
As Kerry Smith, an analyst with Haywood Securities Inc., noted Barrick and Newmont have flirted with a merger many times in the past, including as recently as 2014.
“Everyone agrees it makes infinite sense,” said Smith. “The real question is whether Mark Bristow and his team can deliver their historical performance on an asset base this large and diverse.”