It's now official: Barrick Gold (NYSE:GOLD) and Newmont Mining (NYSE:NEM) failed to negotiate a merger. This means that we will not see a creation of a $33 billion gold mining company – at least for now. Both Barrick Gold and Newmont Mining shares finished the day of the announcement on a sour note. However, I don't see that much reason for pessimism regarding the failed merger.
Press release quarrel highlights merger difficulties
The merger talks finished with the issue of belligerent press releases from both companies. In short, both Barrick Gold and Newmont Mining accused each other of the failed negotiations. Barrick stated that Newmont was trying to reverse the previously arranged terms regarding the location of the head office, the assets that would have been included in a spinoff company and the governance arrangements. In its turn, Newmont stated that it strongly disagrees with Barrick's view of the merger process.
This press release quarrel raises the important question of whether Barrick's and Newmont's union would have been organizationally viable. It looks like officials of both companies held different views on important things while negotiating the merger, and those views did not come closer to each other as a result of negotiations.
Not a merger of equal
The merger of Barrick Gold and Newmont Mining would not have been a merger of equal companies. Barrick Gold is bigger and more cost efficient. Newmont's recent first quarter earnings release revealed that the company was successful in pushing its all-in sustaining costs to $1,034 per ounce of gold. However, Barrick showed sub-$1,000 performances on the cost front in each quarter of 2013. Thus, the possible merger would have lifted the cost of mining gold for Barrick's shareholders.
Barrick stated that the proposed merger could have brought positive synergies on the cost front, but never mentioned which synergies it was talking about. The size of such savings was also unclear. At the same time, one could imagine the difficulties of running the joint company with a plethora of stalled projects and a pile of debt.
Spinoff negotiations could have broken the deal
One thing that Barrick Gold mentions in its press release regarding merger discussions with Newmont is the asset composition of a spinoff company. Spinoffs often receive poorly performing assets, lifting the burden from the parent company. At the same time, the spinoff must be viable enough to continue operating on its own.
Importantly, shareholders do receive shares of the spinoff, and are still exposed to the performance of its assets, just like they were exposed to their performance when these assets were a part of a parent company. That's why the mix of assets in the spinoff is important. The fact that Barrick and Newmont were unable to strike a deal on the composition of the spinoff highlights the differences between the two companies.
So far, this is not a good year for deal making for big gold miners. Goldcorp failed to acquire Osisko Mining, and Barrick Gold failed to merge with Newmont Mining. I don't think that Barrick and Newmont shareholders should be disappointed with the outcome. The resulting company would have been huge and difficult to manage, while the obtained synergies might not have translated to real benefits.