Fool's Gold Report: Will a Newmont-Barrick Merger Really Happen?

Metals mostly fell again, but would a huge merger among gold miners change the industry?

Apr 22, 2014 at 5:55PM

Gold continues to languish, with gold investors seeing few reasons to get optimistic about the yellow metal's prospects. As the stock market has risen, interest in gold has waned, and a lack of any important new developments out of Ukraine, or other contentious areas of the world, has made investors more interested in what they see as higher-returning investments elsewhere. With little interest in the bullion side of the market, investors are focused on possible merger talks between Newmont Mining (NYSE:NEM) and Barrick Gold (NYSE:ABX) that could result in a huge gold-mining giant. Does a merger between Barrick Gold and Newmont Mining make sense? Let's take a closer look.

Nem
Newmont Mining's Boddington gold mine. Source: Newmont Mining.

Getting it together
With the Osisko Mining deal getting so much attention lately, it's somewhat surprising to see merger talks between Barrick Gold and Newmont Mining get relatively little play. The first hint that many investors got of a potential deal came last Friday when the markets were closed, as reports surfaced that the two companies had been in merger talks, but that they had broken down. Although the parties identified about $1 billion in potential cost savings annually due to synergies and other positive elements of a deal, and with those savings equating to around $85 per ounce of gold production, the merger would undoubtedly produce an attractive boost to margins. Yet, the intricacies of which assets would remain in a combined Newmont-Barrick entity, and which would be spun off into separately traded companies, was apparently a sticking point between the two mining giants, and so as of yesterday, many investors had already written off the idea of a merger shortly after learning about it in the first place. Newmont Mining shares soared yesterday, and it was somewhat unclear whether the move came because of the initial merger interest, or because of its apparent failure.

Abx

Source: Barrick Gold.

Today, though, The Wall Street Journal said that even though talks had stalled, Newmont Mining and Barrick Gold were still interested in the concept of a merger. For the two companies, a combination could lead to a new critical look at new development prospects, with more realistic assessments of profitability in light of lower gold prices. Some bullish gold investors argue that the result would be positive for the entire gold market, as reining in unprofitable production opportunities would reduce gold supply and lead to a new equilibrium in the gold market that would support higher prices. In addition, by integrating strategic moves like hedging and sales decisions, Barrick Gold and Newmont Mining might bring greater confidence to the entire gold-mining industry.

Obviously, getting a deal of this size done involves substantial complications. But with some benefits to the move, it's still a possibility -- and Barrick Gold shares rose 1.5% today, in part because of that possibility, as well as an analyst upgrade that took the possibility into account.

How metals moved today
June gold futures fell $7.40 per ounce Monday, settling at $1,281.10. May silver futures managed to pick up $0.01 on the session, climbing to $19.36 per ounce. Platinum-group metals were mixed, with palladium rising even as platinum gave back ground Tuesday.

Metal

Today's Spot Price and Change From Previous Day

Gold

$1,284, down $6

Silver

$19.42, down $0.02

Platinum

$1,396, down $2

Palladium

$782, up $6

Source: Kitco. As of 5 p.m. EDT.

Unfortunately, it's likely to take either a stock market decline or a geopolitical event to reverse the negative sentiment toward gold. With so much attention focused on the mining-company arena, bullion could continue to ease lower if current trends in other markets continue.

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