Is Newmont Mining Really About to Break Itself Up?

Newmont Mining could return to merger talks with Barrick Gold.

Jul 10, 2014 at 1:48PM

A report in The Wall Street Journal stated that Newmont Mining (NYSE:NEM) shareholders were unhappy with the company's performance and urged the company to break up or reenter merger talks with Barrick Gold (NYSE:ABX). Along with Barrick Gold, Newmont Mining has been an underperformer this year, gaining much less than smaller gold miners and its peer Goldcorp (NYSE:GG). Could Newmont really consider such options?

There's still chance that Newmont Mining could return to negotiations with Barrick Gold
Newmont Mining terminated merger discussions with Barrick Gold back in April, pointing to the non-constructive approach of Barrick's co-chairman. A brief quarrel through press releases followed, and both companies were back to business as usual. When speaking about a potential merger, the companies mentioned potential synergies in Nevada, where both are heavily present, and estimated that these synergies could reach $1 billion.

As merger talks ended, nothing was revealed on where this $1 billion figure comes from. The number is significant, and, provided without any specifics, leaves room for skeptics. Barrick Gold stated that the identification of certain assets that would have been included in a spinoff company was one of the main problems that terminated merger discussions. Will it be easier to reach an agreement now?

Perhaps, yes. Newmont Mining is facing difficulties in Indonesia, where it filed for international arbitrage over the copper concentrate export ban. While fellow copper producer Freeport-McMoRan Copper & Gold (NYSE:FCX) is making progress in negotiations, Newmont Mining's moves were harsh. Now, the company could miss cash flow from its Batu Hijau mine for a prolonged period of time. Certainly, this will not please shareholders and will make Newmont Mining search for ways to increase shareholder value.

A breakup is no panacea
Sure, it will be easier for Newmont Mining to decide which operations are core and which are not without Barrick Gold. North American assets are extremely important, and African operations demonstrate very solid performance, as do Australian mines. The problems are in Indonesia and South America.

Indonesian problems were caused by the country's government and multiplied by Newmont Mining itself. In South America, the company faces problems with the aging Yanacocha mine, which should have been replaced by the Conga project. However, the Conga project got stalled due to environmental concerns and opposition from locals, just like Barrick Gold's Pascua-Lama project. While Barrick Gold is working to restart Pascua-Lama, Newmont's Conga is almost without any progress.

The main difficulty with a spinoff is that it must be viable. Instead of packing all underperforming assets under one roof, it's easier to sell them. For example, Barrick Gold has recently been very consistent in selling non-core mines.

That could be a feasible plan for Newmont Mining -- to sell something non-core. Interestingly, the Indonesian situation could develop in such a way that Newmont Mining would be forced to sell its operations in the country. This is not the scenario that is on the table right now, but it is a possible outcome if Newmont Mining's battle with the government gets costly and lengthy.

Bottom line
Newmont Mining has good assets, but it lacks a clear plan on what to do next. The company's shares are underperforming, and investors are starting to lose patience. Soon, Newmont Mining will have a chance to deliver its thoughts on growth, mergers, spinoffs, and Indonesian taxes to a large audience when it discusses its second-quarter earnings on July 30. I can't wait to hear what the company has to say.

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Vladimir Zernov has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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