Barrick Gold (TSX: ABX; NYSE: GOLD) has abandoned its hostile takeover bid for Newmont Mining (NYSE: NEM), after the companies struck a joint-venture deal on their Nevada assets.
Barrick will own 61.5% and Newmont, 38.5%, of the new joint venture, which will be operated by Barrick, and will allow the two partners to “tear down the fences and operate our assets as one mining complex,” Barrick’s new president and CEO, Mark Bristow, declared on a conference call, adding that the “sensible” joint-venture was both “exciting” and “historic.”
Newmont CEO Gary Goldberg said, “After more than two decades of looking at opportunities for further cooperation, we’ve reached a historic agreement to harness the power of both companies’ assets in Nevada to create an even more efficient business in one of the richest gold districts in the world.”
The joint venture will capture an estimated US$500 million in average annual pre-tax synergies in the first five years, which the companies project will total a US$5-billion pre-tax net present value over 20 years.
The joint venture includes Barrick’s Goldstrike, Cortez, Turquoise Ridge and Goldrush, and Newmont’s Carlin, Twin Creeks, Phoenix and Long Canyon, along with associated processing plants and infrastructure of both companies. Excluded from the joint-venture, for now, are Barrick’s Fourmile project and Newmont’s Fiberline and Mike deposits.
It also does not include Newmont’s Cripple Creek & Victor mine.
Once completed, the Nevada joint-venture complex will have three tier-one assets in the form of the Goldstrike-Carlin combination, Cortez complex, and the Turquoise Ridge-Twin Creeks combination, with Goldrush, “another potential tier-one asset,” Bristow said.
The joint venture will rank as the world’s single-largest gold producer, with a pro forma output of more than 4 million oz. gold in 2018 at all-in sustaining costs of US$775 per oz., and 48 million oz. gold in reserves. It will also be “the third-largest gold company after Newmont and Barrick,” Bristow pointed out.
“This joint venture will allow us to view our Nevada assets as one orebody,” he continued, “provide greater ability for capital investment and ensure that the enormous geological potential of the state is realized for all of our stakeholders.”
As operator, Bristow added, it’s up to Barrick to deliver the synergies. “We’re very comfortable that we’ll be able to do that, and I’m sure that Newmont will be looking over our shoulder and making sure that we do.”
Under the agreement, Barrick will control three board seats, and Newmont, two. Technical and exploration advisory committees will have equal representation from both companies.
In terms of structure, a limited liability company out of Delaware will be formed that will hold the assets.
When asked by a Macquarie analyst whether the joint venture in Nevada might be a “stepping stone to a larger deal,” both Bristow and Goldberg said they were not prepared to comment.
As for whether the ownership percentage split might be adjusted after more diligence, Bristow said that “no, it’s what it is.” (The breakdown was based on consensus analyst net asset values for the assets.)
If the partners decide to bring in Barrick’s Fourmile or Newmont’s Mike or Fiberline deposits, any assets included in the future would have to deliver more than a 15% internal real rate of return, based on a backward-looking, two years’ average gold price.
In a research note to clients, Brian MacArthur of Raymond James said the joint venture “achieves a value-add transaction that has been considered by both companies for years, and provides a favourable alternative to the previously proposed merger, given it allows both companies to realize the majority of the potential synergies resulting from combining the two companies’ highly complementary assets in Nevada, without creating a larger and more complex company.”
But he also pointed out in a second research note that “there is some risk that some Newmont shareholders may vote down the Goldcorp deal, as they may not want to share the Nevada joint-venture synergies with Goldcorp shareholders.” (Newmont reached a deal in January to buy Goldcorp [TSX: G; NYSE: GG] in an all-stock transaction valued at US$10 billion.)
Kerry Smith of Haywood Securities applauded the deal in a research note entitled “Finally, common sense prevails.”
“We have always felt that a joint-venture agreement made more sense for both companies than an outright acquisition of Newmont,” Smith says, although he warns that the joint venture might not achieve all the synergies advertised.
“We have rarely seen two entities achieve the level of synergy expected due to cost creep, negative inertia and overly optimistic assumptions, and, as a result, we remain somewhat skeptical of the magnitude of synergies suggested,” he cautions. “However, there are undeniable operating synergies which will be quickly realized, and over the longer term a unitized asset base will lead to much better operating plans and operating decisions, and this is by far the best outcome for Barrick and Newmont.”