Are Merger Talks Between Barrick Gold Corp and Newmont Mining Corp Truly Over?

Generally for a marriage to be successful, both parties have to consent. In the proposed marriage between Barrick Gold Corp  (NYSE: ABX  )  and Newmont Mining Corp  (NYSE: NEM  ) , it seems the two parties could not find common middle ground.

On April 28, Barrick Gold released a press release stating that merger talks between the two gold giants were over. This follows reports from The Wall Street Journal that merger discussions between the two were acrimonious at best. The aborted merger talks mark the latest attempt in a long series of merger attempts between the two companies over the past several years. Both stocks fell after the announcement. 

The rationale behind the merger
The rationale behind the merger is simple. If the two gold giants were to merge, the combined company would have realized up to $1 billion in annual cost savings given that the two gold companies have significant overlap in their Nevada operations.  The proposed company would likely have had stronger negotiating power over local governments and labor unions and a lower all-in sustaining cost of production. 

Why the merger talks didn't work out
The merger talks didn't work out because two companies could not agree on how the combined business would be run. The management, for example, could not agree on the location of the head office, the leadership hierarchy of the new company, or the type of assets that the combined company would spin off. 

It also seems that the cultures of the two companies are radically different as well. 

The bottom line
The failed merger attempt does not change the fact that both Barrick Gold and Newmont Mining need to cut costs. Shareholders of both companies have seen the value of their investments fall significantly as gold prices tumbled from $1,900 per ounce in 2011 to $1,286 per ounce today. Investors want to see their investments do well, and cutting costs is the easiest way to do so. 

So far, the two companies have made significant individual efforts at cutting costs.

Barrick Gold, for example, has shed $1 billion in non-core assets and reduced total costs by around $2 billion in 2013. It plans to reduce its total number of mines from 27 in 2013 to 19 and hopes to reduce its all-in sustaining cost to $920-$980 /oz for 2014 so that it can be more profitable. 

Newmont Mining has also made significant efforts to reduce its costs. The company reduced spending by nearly $1 billion and divested $600 million in non-core assets in 2013. It plans to reduce capital expenditures by 30% in 2014 and hopes to lower its all-in sustaining cost to $950-$1,050/oz by 2015. 

If gold prices remain range-bound or rise, the two companies' individual plans may be enough to satisfy investors. If gold prices fall far enough, however, shareholders will want more cost reductions, and the two gold companies may hold merger talks again. The marriage talks between the two gold giants may not truly be over.

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Jay Yao

Jay is an energy and materials writer. He reports on oil and gas fundamentals and macro trends in the industry.

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8/28/2015 4:00 PM
ABX $7.13 Up +0.29 +4.24%
Barrick Gold Corp. CAPS Rating: ***
NEM $17.17 Up +0.47 +2.81%
Newmont Mining Cor… CAPS Rating: ***