Newmont Mining Corp Is Still in Barrick Gold's Sights

Cortez mine in Elko, Nev. Source: Barrick Gold.

With up to $1 billion in potential merger synergies, it seems ludicrous to think Barrick Gold (NYSE: ABX  ) won't attempt very soon to make the rumored merger with Newmont Mining (NYSE: NEM  ) a reality. The world's top two gold miners, respectively, would create a $33 billion behemoth with quality assets around the globe, but investors have been promised similar paths paved with gold before, and this union might be viewed with a jaundiced eye as a result.

Merger discussions between Barrick and Newmont are nothing new as the two have bandied the concept about for decades with nothing coming to fruition. But this time, all the major points of possible contention have been reportedly ironed out, with the only sticking points being which assets in Australia and New Zealand need to be spun off.

Barrick owns three properties in the region, including a 95% interest in the Porgera mine in Papua New Guinea, its Cowal mine, and a 50% interest in the Kalgoorlie mine, in which Newmont owns the other half. Last year, Barrick sold its interests in the Yilgarn South properties in western Australia while completing the sales of its Plutonic and Kanowna mines there this year.

In comparison, Newmont has 17% of its assets in the Australia/New Zealand region, but derives a third of its sales from it, with the primary asset being the Boddington gold and copper mine. It produced 704,000 ounces of gold and 66 million pounds of copper in 2013, and Newmont reported it had 13.7 million ounces of gold reserves and 1,490 million pounds of copper reserves at year end.

Boddington mine, western Australia. Source: Newmont Mining.

The historical costs at Boddington have been exceptionally low, running at an average of $322 per ounce for gold and just $0.16 per pound for copper. However, Newmont estimates future costs will be dramatically higher, with gold nearly tripling to $968 per ounce and copper running as high as $2.04 per pound. One would have to imagine this would be one mine Barrick might want to shed.

Where they would find common ground is in Nevada where Barrick derives some 60% of its production and nearly a third of Newmont's assets are located. Because of their geographic proximity to one another, most of the savings forecast from the tie-up would probably be realized there.

But once bitten, twice shy, and Barrick's expensive $7.7 billion acquisition of Australian copper miner Equinox still has investors licking their wounds. The founder and chairman of Barrick, Peter Munk, is set to pass control to John Thornton at the end of this month in no small part because of the abject failure of the acquisition to achieve the purported synergies promised. Barrick ended up having to write down billions of dollars worth of assets as a result, and along with its stalled Pascua-Lama mine in Chile, the C-suite has been in turmoil. 

To now expect investors to bark happily about a new deal, one that will cost tens of billions of dollars more, may be a bit too much, even if there are some solid reasons this deal could work. Lower-cost domestic assets, higher-cost international ones eliminated, and an easier time integrating corporate cultures because of past cooperation between the two gives hope the deal would work. And the rumored price Barrick is offering for Newmont -- estimated to be around 13% above the miner's 20-day average share price -- means it's paying a fair price, not an overheated one. 

Barrick's stock is down over 8% since the rumors first broke, and that's understandable given the above, but there's still a lot to commend this merger and both sides seem willing to actually cement the deal this time.

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