Gary Goldberg, chief executive of Colorado-based Newmont Mining Corp., started off Tuesday morning feeling upbeat.
One day after announcing his company’s US$10 billion bid for Vancouver-based Goldcorp Inc., his company’s stock was trading down, again, falling three per cent at one stage on Tuesday, after falling 8.89 per cent on Monday; and now Goldcorp was also trading down more than three per cent.
Reaction to the deal looked decidedly mixed. One analyst was raising questions about the rationale for the deal and another was suggesting the price was too low and Goldcorp could attract other bidders; and yet Goldberg insisted none of it was surprising or unnerving in the slightest.
“I think, at this stage, because there was very little market noise in advance, we’re really getting people up to speed, and explaining it,” Goldberg told the Financial Post on Tuesday.
Under the deal, Newmont would acquire each Goldcorp share for 0.328 of a Newmont share plus two cents cash — a 17 per cent premium to Goldcorp’s volume-weighted trading price, which had already been beaten down in 2018 from more than $19 last January to around $13 by December.
According to Goldberg, the rationale for buying Goldcorp is quite simple: Combining its portfolio of mines with Newmont’s portfolio creates value for shareholders, including $100 million in annual synergies.
By applying the Newmont approach to Goldcorp’s portfolio of mines and development properties, Goldberg said he can create a company, to be called Newmont Goldcorp, that would sustainably produce six to seven million ounces of gold per year.
“We strongly feel this is going to position the company as the go-to gold company going forward,” he said, “We’re taking the operating model and approach we’ve applied over the past few years and applying that to the Goldcorp assets.”
The transaction was not about “getting bigger,” Goldberg said, rather it is about taking Goldcorp’s assets and re-evaluating the sequence of mines in development to create value. Beyond that, he declined to provide any specifics.
Not all analysts find the rationale compelling.
CIBC Capital Market’s Anita Soni thinks the “uncertainty” surrounding Goldcorp’s long-term production and cost outlook would create an overhang on Newmont’s share price.
“We are downgrading Newmont from outperformer to neutral until the company provides additional clarity on its strategic plans,” Soni said in a note to clients on Tuesday.
On the other side of the deal, Michael Siperico, of Macquarie Capital Markets, upgraded Goldcorp from neutral to outperform because another potential bidder could emerge.
“I think this is a classic case of missing the forest for the trees and not really putting the transaction in the proper context,” Siperico said about the negative market reaction to the deal.
Siperico said that the rise of exchange traded funds and metal royalty companies in the past decade has increased competition among gold companies to attract investors. In this context, many institutional investors looking for exposure to gold through mining companies want the least risky option.
… I can see more compelling reasons for an interloper to come over the top. It’s a relatively slim premium.
Michael Siperico, Macquarie Capital Markets
Newmont, which has announced expected production of five million ounces of gold in 2019 from its own assets, is already one of the largest gold companies in the world — if not the largest — and the only gold company on the S&P 500, he said. It is already big enough, with enough liquidity to attract investors, Siperico said.
But he added that smaller companies with less liquidity might gain more value by combining with Goldcorp.
Given that Newmont is offering a 17 per cent premium on Goldcorp’s stock when it’s trading near a historic low, Siperico suggested the price was low and that Barrick Gold Corp., Agnico Eagles Mines Ltd. and other gold companies could afford to pay more for Goldcorp and still gain value.
“I’m nominally a fan of the deal,” he said. “I’m just saying I can see more compelling reasons for an interloper to come over the top. It’s a relatively slim premium.”
Barrick and Agnico did not provide comment for this article. But Newmont’s deal with Goldcorp is not expected to close until the second quarter of 2019 at the earliest, which leaves several months for a new bidder to consider the deal.
The current deal includes a US$650 million breakup fee if Newmont calls off the deal and a US$350 million breakup fee if Goldcorp is responsible.
Goldberg said he was busy making plans to integrate the two companies, and to introduce his successor, Tom Palmer, Newmont’s chief operating officer, to the company’s investors.
As part of the deal, Goldberg said he agreed to stay until the end of 2019 when Palmer will takeover as chief executive.
“I think in general this is moving as expected,” he said.