Barrick-Newmont: Nevada JV a win for both sides

The complex will become the world’s single largest gold producer, with an output of more than 4 million ounces in 2018

Ruth Saldanha 13 March, 2019 | 12:15AM

After Newmont Mining Corporation’s (NEM) rejection of Barrick Gold Corporation’s (ABX) unsolicited acquisition on March 4, a week later, on March 11, the companies announced their joint venture (JV) agreement for their Nevada assets. Barrick also agreed to withdraw its unsolicited bid for all of Newmont, and as a result, Newmont will continue to pursue the completion of its acquisition of Goldcorp (G) independent of the joint venture announcement.

“This joint venture announcement is fantastic news for the sector, and for the companies as well. The joint venture has great synergies and works well for both. It should have been done 20-years ago,” said Greg Taylor, portfolio manager at Purpose Investments. Purpose Investments holds a position in Newmont.

Barrick will contribute Goldstrike, Cortez, Turquoise Ridge, Goldrush, and South Arturo, while Newmont will contribute Carlin, Twin Creeks, Phoenix, Long Canyon, and Lone Tree. Barrick will own 61.5% of the joint venture while Newmont will own 38.5%.

“The difference in ownership from Newmont’s initially proposed ownership split of 55% Barrick and 45% Newmont stems from the exclusion of Newmont’s Cripple Creek & Victor mine. Barrick’s contributions are more valuable and establish its larger ownership in the joint venture,” said Morningstar analyst Kristoffer Inton. He pointed out that this also gives Barrick operational control of the operator of the joint venture as well as three board seats governing the joint venture compared with Newmont’s two seats.

The companies reaffirmed the $4.7 billion net present value of synergies that Barrick had included in its initial bid, although the figure is subject to change as operation of the assets in unity progresses.

Based on ownership percentages, this results in $1.8 billion net present value attributable to Newmont shareholders and $2.9 billion net present value attributable to Barrick shareholders. Annual run-rate synergies of $500 million comprise about 20% of the combined direct production cost of the assets, which doesn’t include savings on capital equipment that can be shared.

Inton feels that due to the proximity of the mines included in the joint venture, the synergy targets and net present value seem reasonable.

Taylor broadly agrees, saying that “From an operational standpoint, the joint venture can prioritize optimization, so one can get excited about the potential upside”.

Inton has raised his fair value estimates for both Newmont and Barrick. His fair value estimate for Goldcorp remains unchanged.

This is the second time in five years that merger discussions between Newmont and Barrick have been initiated and failed. And after this JV, it is unlikely that merger discussions will reopen – at least for the next two years, Taylor says.

“There are a lot of moving parts for Barrick, with the new CEO Mark Bristow in place. His first move was on Nevada, which was low hanging fruit. It will be interesting to see what the company does with its assets in South America, Africa, Indonesia, and Australia, going ahead,” he said.

Taylor expects further consolidation in the sector, especially once non-core mid-tier assets from the Barrick-Randgold and Newmont-Goldcorp mergers come to market.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Barrick Gold Corp22.60 CAD-1.09
Newmont Goldcorp Corp38.48 USD-0.36

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Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca