Mining mergers and acquisitions have given producers production boosts over the years, and the latest major merger for Barrick Gold Corp. and the planned merger for Newmont Mining Corp. will add to their production, while also leading to Newmont switching places with Barrick as the world’s largest gold producer.
The Newmont-Goldcorp Inc. merger that the companies expect to complete in the second quarter is estimated to provide gold production of between 6 million and 7 million ounces a year well into the future, putting the company at the top in production.
Newmont estimated gold production of 5.2 million ounces in 2019 without the merger. Goldcorp reported on Jan. 28 that gold production totaled 2.29 million ounces in 2018. With those Newmont and Goldcorp figures to provide an estimate, the merged company could produce up to nearly 7.5 million gold ounces this year.
Barrick and Randgold Resources Ltd. formally merged Jan. 1. Barrick’s reported production totaled 4.53 million ounces of gold in 2018, and Randgold reported 2018 gold production of 1.28 million ounces. With those figures, the new Barrick could produce 5.81 million ounces of gold in 2019.
Barrick and Newmont are adding to their gold reserves, building their companies and going into different corners of the world with their mergers, while the market may talk about other potential mergers in the mining industry or look back at earlier mergers.
The two companies are “both pretty successful businesses,” said John Dobra, who retired in July after years of watching the mining industry as an associate professor of economics at the University of Nevada, Reno, founding director of the Natural Resource Industry Institute and a senior fellow at the Fraser Institute.
He said in Newmont’s case there aren’t a lot of synergies with Goldcorp, especially in Nevada where Goldcorp no longer has a presence, “so the only rationale is that they want to get bigger. That’s legitimate, and from Goldcorp’s standpoint, they got a good deal.” Goldcorp sold its share of the Arturo Mine operated by Barrick and used to operate the Marigold Mine at Valmy.
Looking at mining mergers over the years, Dobra said “there are a lot of reasons why they merge. It depends on the circumstances. Some are takeovers, getting aggressive, others are defensive,” if one company isn’t doing well but has a lot of assets, he said.
“As a mining company produces, it is destroying its assets, so they have to keep acquiring reserves to maintain their business,” Dobra said. “One goal is to discover minerals. The other is go out and acquire them.”
Gold prices are factor
Gold prices have a lot to do with mergers. Dobra said when the price is lower, companies may find it cheaper to buy reserves through acquisition or merger then invest in major exploration efforts.
The current gold price in the $1,300s to $1,320s range per ounce is much better than the price slumps in the early 2000s that went as low as $255.40 in 2001, but after the surge to $1,900 an ounce in September 2011 companies may not consider $1,300 a peak price
Gold reached $1,329.25 on the London afternoon fixing chart on Jan. 31.
“I want to emphasize that a lot has to do with the price of gold. When the price is high, companies don’t want to give away any profit potential. When that goes away, there is incentive to merge,” Dobra said in a Feb. 6 telephone interview.
Dobra said low gold prices was the driver in the late 1990s when Barrick acquired Homestake Mining and Newmont acquired Santa Fe Pacific Gold, for example. Barrick and Placer Dome later merged, adding more mines and reserves to Barrick’s portfolio.
Worldwide, mergers such as Barrick’s with Randgold and its more recent strategic alliance with Reunion Gold Corp. sometimes provide political diversification for companies, and “there are advantages to that,” Dobra said.
Toronto-based Barrick has major operations in Nevada that include the Cortez and Goldstrike complexes and 75 percent ownership of the Turquoise Ridge Mine, with Newmont as 25 percent owner. The merged company also has operations in Montana, Ontario, Dominican Republic, Mali, Saudi Arabia, Chile, Argentina, Peru, Papua New Guinea, Zambia and the Democratic Republic of Congo.
Barrick acquired Randgold Resources Ltd. in a $6 billion arrangement. Newmont’s deal with Goldcorp is for $10 billion.
Newmont’s planned merger with Goldcorp will extend the company’s reach. Newmont has operations on the Carlin Trend, the Twin Creeks Mine in Humboldt County and the Long Canyon Mine in Elko County, as well as the Cripple Creek Mine in Colorado, along with operations in Ghana, Australia, Peru and Suriname.
Goldcorp has mines in Canada, Argentina and Mexico.
Barrick President and CEO Mark Bristow said in the earnings teleconference Feb. 13 that the aim of the merger with Randgold’s “was never to be bigger. It was to combine world-class assets and world-class, experienced people.”
He also said that in the short time since the merger, Barrick has fully functional regional offices and is making progress restructuring and instilling a focus on mineral resources and life of mine, rather than high-grade mining to increase cash flow.
“This growth will be driven and directed by a management team with a mix of skills and experience that few other gold mining companies can match,” Bristow also said in the fourth-quarter earnings presentation.
He said the “new Barrick has a unique ability to grow three-dimensionally through its large and high-quality exploration portfolio and geological capability” with brownfield projects at existing mines and new projects.
Newmont’s CEO, Gary Goldberg, said Newmont is constantly reviewing opportunities to raise the company’s performance, and the combination with Goldcorp “represents the most promising path to deliver superior and sustainable value for our shareholders, employees, host countries and communities.
“We are designing our business to thrive through the cycles in gold prices and making sure that, going forward, our projects and operations deliver at least a 15 percent rate of return,” he said in comments provided by Newmont.
Goldberg said in the merger announcement in January that the companies have similar cultures and the combination, to be called Newmont Goldcorp, is expected to generate up to $100 million in annual pre-tax synergies. In a later interview with CNBC, he said synergies initially will be focused on headquarters and regional offices.
Newmont is based in Greenwood Village, Colo. Goldcorp is based in Vancouver, British Columbia, where North American headquarters will relocate from Elko under the merger.
Goldcorp CEO David Garofalo said in the January announcement the company’s assets will be “centered in the world’s most favorable and prospective mining jurisdictions and gold districts.”
When companies agree to merge, or merge in a takeover, such as happened when Newmont acquired Normandy Mining in competition with Anglogold in early 2002, shareholders of the company being bought come out ahead. The company being acquired receives shares and incentives from the other company.
“If a stock was $1 and someone comes along and offers to give you $1.25, that’s the premium for saying OK,” Dobra said, and sometimes those shareholders try to hold out for higher premium.
In smaller merger cases, smaller companies need cash flow. Dobra pointed to the merger of Pershing Gold into Alio Gold Inc., which now operates the Florida Canyon Mine in Nevada and the San Francisco Mine in Mexico.
Other recent mergers affecting mines in Nevada have included Hecla Mining Co.’s acquisition of Klondex Mining Mines Ltd. last year.
Mergers over the years involving companies with operations in Nevada have reduced the number of mining companies in the state, but they haven’t had an impact on the Nevada Mining Association.
“I’ve not noticed any discernible impact on NvMA’s membership or events from previous mining mergers,” said Dana Bennett, the association president.
According to news reports, analysts are looking at companies such as Kinross Gold, Iamgold Corp., Anglogold Ashanti Ltd. and Newcrest Mining Ltd. for future merger deals.
Goldcorp’s Garofalo told Bloomberg in January there aren’t many senior producers left to consolidate, but there is room for mergers among the mid-tier and junior companies.
According to Reuters, Barrick CEO Bristow told reporters on Feb. 5 on the sidelines of a mining conference in Cape Town, South Africa, that “the one thing about business is that it eventually kills you. If you don’t perform, the options run out. The gold mining industry is actually at that point and now you’re seeing people making decisions.”