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Barrick Gold is feverishly working on a strategic plan to boost output, lower costs, and perhaps retain its ranking as the world's largest gold producer. That last part just hit a snag.
Shares of Goldcorp (GG) rose over 12% today after the company announced it had agreed to be acquired by Newmont Mining (NEM 0.54%) in a $10 billion stock-for-stock deal. As stated in the press release, "this combination will create the world's leading gold business." The combined company will be called Newmont Goldcorp, assuming the acquisition is approved by regulators.
As of 10:45am EST, the stock had settled to a 9.6% gain.
For each share of Goldcorp owned, shareholders will receive 0.328 shares of Newmont Mining and $0.02 in cash. When the acquisition closes, which is expected to occur in the second quarter of 2019, current Goldcorp shareholders will own 35% of the new company.
Goldcorp and Newmont Mining also issued an investor presentation highlighting more details about the deal and proposed operations of the combined company. They expect Newmont Goldcorp to have annual gold production of 6 million to 7 million ounces, from sources including the world's highest concentration of reserves in Canada (an estimated 17 million ounces), the United States (an estimated 29 million ounces), and Australia (an estimated 20 million ounces). Given obstacles facing miners in South America and Africa recently, the ability to take geopolitical risks off the table could be a significant advantage insofar as providing certainty to shareholders is concerned.
Newmont and Goldcorp expect the combined company to save $100 million in annual pre-tax synergies when the dust settles. They also plan for it to divest $1 billion to $1.5 billion in assets in the next two years.
If the acquisition closes, Newmont Goldcorp will be the largest gold company in the world based on enterprise value ($32 billion), annual production (7.8 million ounces), and free cash flow ($1.6 billion per year). It will sport the highest dividend yield (1.6%) to boot. Barrick Gold will come in a respectable second place on each of those metrics.
While this proposed megamerger is certainly intriguing, investors shouldn't overlook one key fact: gold stocks have been downright awful investments for a long time. The 10-year total return (share performance plus dividends) of Newmont Mining shares is just 3.8%. Goldcorp has delivered a total return of negative 53% in that span. Both are embarrassingly behind the S&P 500, which has sprinted to a 266% total return in the last decade. Therefore, investors shouldn't think this merger will be a great investment. All the evidence on gold stocks suggests it won't be.