Newmont Mining and Barrick Gold Could Be Forced to Merge

There have recently been several developments that make a merger between Newmont and Barrick more likely.

Jul 22, 2014 at 8:04AM

Newmont Mining's (NYSE:NEM) management only has one thing on its mind right now: the Indonesian Presidential election results, due out on July 22.

Hopefully, the losing candidate will accept the loss, giving Newmont confidence in a swift resolution to its dispute concerning the Batu Hijau mine. Unfortunately, both presidential candidates have claimed victory based on early quick counts, and there are concerns that the vote could have been rigged. However, as mentioned above, the official results are due on July 22.

Indonesian issue
The stalemate in Indonesia is expected to hold Newmont back this year and for the foreseeable future. Newmont idled activity at its Batu Hijau mine following the government's introduction of a raft of new export bans, taxes, and fees on Newmont's regional subsidiary.

The company has not exported from the region since January, and relations between Newmont and the government are becoming increasingly frosty. It is believed that Newmont will not reach an agreement on exports until 2015 or 2016, so the company has some time to wait. Even then, there is no certainty that an agreement will be reached.

Merger mania
Some Wall Street analysts believe that if Newmont runs into further trouble within Indonesia, the company will once again return to the negotiation table with Barrick Gold (NYSE:ABX).

It's no secret that the idled Batu Hijau mine is a thorn in Newmont's side, and a merger with Barrick would allow the company to make cost savings elsewhere, improving profits and shareholder returns.

Oddly, analysts have also started to speculate that Barrick could be forced back to the deal table itself following a deal in Saudi Arabia.

Saudi Arabia
It was announced recently that Barrick Gold was forming a joint venture with Saudi Arabian Mining Co (Ma'aden) to develop and operate Barrick's delayed Jabal Sayid copper mine in Saudi Arabia.

Barrick hopes that this partnership will bring an end to the delays which have plagued the mine, allowing it to start at some point during 2015.

The Ma'aden company is controlled by the Saudi state, so it knows how to get things done within the Kingdom. The state-controlled entity has agreed to buy a 50% share in the project for $210 million.

Why could this deal spark merger interest between Newmont and Barrick? Well, Barrick has been slashing capital spending recently in an attempt to generate free cash flow. This deal to develop the Jabal Sayid project will require additional capital, something that Barrick has no choice in providing, although it may not want to.

Barrick would be able to free up extra cash by merging with Newmont. The merger would allow the two companies to combine their operations within Nevada and across the world, driving down costs and increasing cash flow. This could be an attractive prospect for Barrick as it seeks to cut costs and improve profits.

The bottom line
A merger between Barrick and Newmont could be back on the table, although this time the two companies may be forced together. A merger would give Barrick the ability to cut its production costs, freeing up cash for development spending. Newmont, meanwhile, would be able to reduce its exposure to Indonesia.

As of yet no deal is in the works, but things could start moving very soon.

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