Barrick’s Gold Rush for NewmontThe possible merger of Barrick (GOLD US) and Newmont (NEM US) was one of the main corporate topics yesterday. What do we know about it?
- Barrick is the initiator of the transaction. Actually, this is not the first attempt by these companies to unite. If my memory serves me right, the latest attempt, an unsuccessful one, was made in 2014.
- Barrick proposes to purchase Newmont’s shares at a discount to the market price. In particular, the merger would offer 2.5694 Barrick shares for each NEM share. Friday’s closing price is about $33.5, which implies a discount of 8% to the market price. Thus, the entire company is valued at $ 17.85 billion.
- The birth of a giant. If the merger takes place, a real giant with a production volume of about 10 million ounces of gold and revenue of about $ 16 billion will appear in the market.
What do I think about this transaction? I am not an industry person so I will bring forth my arguments from an investor’s point of view.
First, the transaction is far from a given. I believe that Newmont is obviously undervalued. Barrick valued Newmont at an EV/EBITDA of 7, while the average of the sector is about 8.6, according to Bloomberg. According to the EV/Reserves and EV/Output multipliers (which are used to evaluate gold mining companies), the valuation of the company was done almost in accordance with market prices. Nevertheless, there is no premium for any multiplier. What are the benefits of Newmont shareholders? Moreover, it seems like this transaction is more important for Barrick than Newmont.
Secondly, if Newmont merges with Barrick, most probably, the merger with Goldcorp will not take place. As I understand, the process is already close to the final straight. Is the deal with Barrick worth sacrificing Goldcorp? I am not ready to answer this question at this point.
Thirdly, I believe that a huge hypothetical company carries high risks associated with corporate governance. It will not be easy to manage such a sockdolager.
$17.8 billion Barrick’s bid
I guess we should avoid drawing conclusions as to whether the transaction will take place or not and who will benefit more ahead of time. By the way, why not fantasize and imagine that Warren Buffett is standing behind the transaction. He could be trying to somehow get out of under after the fall of Kraft Heinz…
Joking aside, shareholders of Newmont, in my opinion, must not be happy with this proposal, which makes me believe that the merger will not take place under the terms proposed. Moreover, I do not exclude that Newmont will sink a bit (many people have purchased shares against this transaction) in the event of cancellation, which will be a good opportunity to purchase shares at a discount.
The very fact of Barricks’ proposal confirms my arguments about the active process of consolidation in the sector. Judge for yourself. Gold mining is one of the most fragmented sectors in the global economy – two leaders and a whole bunch of medium and small-sized companies.
What do potential buyers seek? First of all, they check on the quality of assets, the size of reserves and resources, as well as the total cost of extracting one ounce of gold (all-in sustaining costs or AISC). In addition, a potential buyer will pay attention to the amount of debt, perspectives of operational performance, and profitability.
Will Barrick try to catch a smaller bird?
I have made a list of medium-sized companies, which, in my opinion, could be absorbed by larger ones. For example, if the purchase of Newmont fails, Barrick may well focus on some other smaller company. Moreover, we cannot rule out the factor of Newmont. Agnico, Newcrest, Anglogold, Kinross and, finally, our dear Polyus are also there.
I have to stress once again that each of the companies above may become subject of acquisition in the foreseeable future. Each of these companies is quite promising in terms of production and revenue growth and is characterized by fairly high profitability. Besides, none of them has had a high level of debt (if the Net debt/EBITDA ratio is lower than 3, I believe there is nothing serious to worry about).
In terms of the current market valuation, I liked B2Gold, Centerra, and IAMGOLD. I think B2Gold had the most coherent valuation (taking into account one of the lowest AISC on the list; see chart). Centerra and IAMGOLD seem like the most undervalued.
I do not claim that these three companies will definitely become objects of acquisition in the near future. I am just pointing out their advantages.
The sector is in the process of intensive consolidation. Now all attention is paid to the possible transaction between Barrick and Newmont. After the transaction takes place (or fails), M&A processes may still continue in the sector. Or, the other way around. While the giants are arguing about how they should merge or whether they should unite at all, somebody may make a couple of deals on the sly…
A quite interesting period is awaiting the gold sector! I have my popcorn already.
The article was written by Evgeny Kogan, Ph.D., investment banker, the author of the telegram-channel Bitkogan.