In a hostile takeover move, Barrick has presented Newmont shareholders with a proposed merger plan worth close to US$18 billion in stock.
Barrick Gold (TSX:ABX, NYSE:GOLD) made an official bid to merge with Newmont Mining(NYSE:NEM) early Monday (February 25), in a deal that Barrick believes would create US$7 billion in net present value (NPV) of real synergies.
The potential merger, which was hinted at on Friday (February 22), would combine the two largest gold producers in the world, be worth close to US$18 billion in stock and would focus largely on both of the company’s assets in Nevada.
“Nevada is the crux of our proposal,” Mark Bristow, president and CEO of Barrick said in a conference call following the announcement.
Bristow said that while Newmont owns key processing plants in Nevada, Barrick’s gold reserve grade in the western US state is three times higher than that of Newmont’s. Due to this fact, Bristow contends that by the companies merging, they would be able to create a more effective use of all of the processing facilities in the area.
“The whole of Nevada [would] effectively [be] one orebody,” Bristow said, adding, “[t]he combination of Barrick and Newmont will create what is clearly the world’s best gold company, with the largest portfolio of tier one gold assets.”
In fact, Bristow revealed that the merger would create US$4.7 billion from Nevada synergies alone.
According to Barrick’s merger proposal, Newmont shareholders would receive 2.5694 common shares of Barrick for each Newmont share. That translates to a price of about US$33 per Newmont share, valuing the company at approximately US$17.85 billion.
Barrick also intends to match Newmont’s annual dividend of US$0.56 per share, which, based on the proposed exchange ratio, will represent a pro forma annual dividend of US$0.22 per Barrick share.
Bristow added that he has,“never seen a premium as high as this offered in the [mining] industry.”
In terms of how the merged company would split, Barrick proposed that its shareholders would own approximately 55.9 percent, while Newmont shareholders would own approximately 44.1 percent.
However, one of the two rather large roadblocks that the deal faces stems from the fact that Newmont is currently on the verge of closing its own giant US$10-billion buyout of smaller rival Goldcorp (TSX:G,NYSE:GG) next quarter.
Barrick was forthcoming with the fact that the entire merger with Newmont is contingent upon Newmont severing its deal with Goldcorp and paying the US$650-million break fee.
“[Barrick does not] want Goldcorp’s lower quality assets in our portfolio,” Bristow stated.
The second, and more severe, roadblock that the deal faces is convincing Newmont.
Prior to Barrick’s hostile bid announcement, Newmont’s CEO Gary Goldberg, told Bloomberg, “it’s a desperate and bizarre attempt to muddle up our deal … and it’s certainly not the sort of behavior that will appeal to investors who want to invest in serious, well-run companies.”
In a Newmont press release regarding the matter, the company weighed both the pros and cons of the merger, but stayed firm in its belief that the deal with Goldcorp would not only benefit them greatly, but would also involve less risk than if it were to merge with Barrick.
“Newmont has previously reviewed and rejected potential combinations with each of Barrick and Randgold Resources, prior to their merger,” the company stated.
“We are continuing to move forward with this [Goldcorp] transaction,” said Goldberg, adding, “[t]he shareholders of the company are going to have to choose between two deals — one of which you offered at a 17 percent premium and one being offered at a discount.”
For Goldcorp’s part, the company stated that it had “no comment” when the Investing News Network reached out to the miner after the news broke.
However, the deal between Goldcorp and Newmont seems to be moving along, as the former company reported on Friday that it had obtained an interim order from the Ontario Superior Court of Justice “in connection with the previously announced statutory arrangement for the acquisition by Newmont.”
“The combination of the two companies will create an unmatched portfolio of world-class operations, projects, reserves, exploration opportunities, and talent,” Goldcorp added.
While a certain animosity will be created should one deal be terminated in favor of another, it is hard to ignore the fact that the bigger picture of what it means for the gold space as a whole is a higher priority.
As gold prices continue to rise and investors gravitate towards the yellow metal as a safe haven from a hostile geopolitical landscape, an increase in production from two companies merging could be exactly what the gold sector needs right now.
As of 12:23 p.m. EST on Monday, Barrick was down 1.05 percent trading at C$16.95; meanwhile Newmont was relatively flat at US$36.31 and Goldcorp was up 0.21 percent, trading at C$14.63.
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Securities Disclosure: I, Nicole Rashotte, hold no direct investment interest in any company mentioned in this article.