One day after announcing a deal to effectively create the world’s third largest gold company, Mark Bristow, chief executive of Barrick Gold Corp., stayed in Elko, Nevada — a dry, rugged city situated near the Carlin Trend, one of the world’s richest gold mining districts — to assemble the team responsible for executing his promises.
For decades, Toronto-based Barrick Gold Corp. and its archrival Colorado-based Newmont Mining Corp., the two biggest gold mining companies in the world, have fuelled a large part of their growth through discoveries along the Carlin Trend, and tried numerous times to reach an accord to work together there.
Now, Bristow, 12 weeks into his tenure at the helm of Barrick, is holding up a joint venture agreement with Newmont to share assets in Nevada, which he claims will save both companies US$500 million per year, and billions of dollars over the long run. What’s more the deal was ramrodded through in a matter of days while Bristow proposed a $17.8 billion hostile offer to takeover all of Newmont.
In the end, Bristow agreed to drop his hostile bid in exchange for a 61.5 per cent cut of the revenues from the joint venture and control of the Nevada mines and infrastructure. The joint venture will produce 4.1 million ounces of gold this year, making the Nevada complex the third largest gold producer in the world.
Both Bristow and Newmont chief executive Gary Goldberg are celebrating the deal, but some analysts and investors question whether the cost savings will accrue equally to both sides, and whether the size of the estimate is accurate.
“Despite people going into a stir about whether I can do these things, I’ve shown them that I can,” Bristow told the Financial Post in an interview from Elko.
Still, many in the industry are questioning what will happen after a two-year standstill agreement between the two companies that prevents hostile bids expires, and the rivalry resumes. By then, Newmont’s Goldberg will be gone, having announced his retirement later this year.
For now, the two companies’ consolidation in Nevada opens a new chapter in the history of the Carlin Trend, where Newmont derived about 1.7 million ounces of gold and 32 million pounds of copper in 2018, and where Barrick derived 2.3 million ounces of gold in 2018, accounting for more than half of its production
The gold belt runs several dozen miles long and several miles across in northeastern Nevada, and occupies a central role in Newmont’s history, which poured its first gold bar there in 1964.
According to a Newmont spokesman, it’s where the company discovered new ways to dig up and separate out “microscopic gold.” Today, geologists use the term “Carlin-type mineralization” to indicate ore where gold is present yet nearly invisible.
By contrast, Barrick only arrived in the area in 1986, but derived 52 per cent of its gold from the area in 2018, and is in the process of defining new deposits that will extend its production there.
Despite people going into a stir about whether I can do these things, I’ve shown them that I can
Goldberg told the Financial Post he’s been wondering why the two companies don’t share resources in Nevada since he visited the area in the 1990s while still working as an energy executive at a different company.
“From that time, I always marvelled at why were these things being run separately rather than finding a way to work together,” he said. “When I joined Newmont in 2011 that was something I had at the forefront.”
Over the years, the two companies contemplated sharing assets and even merging, most recently in April 2014. That last round of talks fell apart acrimoniously and former Barrick chairman Peter Munk, who passed away last year, said at that time it was “difficult to make a deal” with Newmont because it had a different culture, and was “not shareholder friendly.”
In the intervening years, the companies did strike agreements: They’re co-owners of a mine, and Newmont processes some of Barrick’s ore at its mill. Still, because their shareholder base overlaps significantly, there’s long been pressure to find greater synergies.
This fall, Goldberg said he sensed an opportunity to re-initiate discussions when Bristow moved into Barrick’s long empty CEO suite after his former company, Randgold Resources Ltd. was acquired for US$6 billion. The pair had only met a couple times, Goldberg said.
“It looked like an opportunity for us to sit down, so I was hopeful that we could,” Goldberg said. “We had favourable email exchanges right up until the end of January.”
That month, Newmont had announced it would pay a 17 per cent premium for Goldcorp, which was trading at its lowest point in more than a decade, in a US$10 billion deal.
Goldberg said Goldcorp had essentially been working on “a volume strategy” of increasing its gold production. Newmont can increase the value of the company’s assets by changing the way the mines are managed, and focusing on free cash flows, he said.
But the market reacted negatively to his idea, and Newmont’s share price plummeted 11 per cent on the day the deal was announced.
Bristow said the poor reaction created an opportunity and he pounced.
“Barrick has been trying to get this Nevada deal done for 20-plus years,” he said. “We engaged repeatedly and Newmont decided to put itself in play and we engaged in the public forum.”
In February, Barrick made a hostile offer that called for Newmont to end its pursuit of Goldcorp and for its shareholders to accept an eight per cent discounted buyout.
A principal rationale for the deal, Bristow said, would be $4.7 billion in synergies in Nevada over the next 20 years.
Many analysts have speculated that Bristow never believed the bid would succeed.
“Maybe Mark never intended the merger, maybe the no-premium offer was a way to get the Newmont guys to wet their pants and do the Nevada JV,” said John Tumazos, an analyst and investor with Very Independent Research.
Earlier this month, as thousands of mining executives gathered in Toronto for one of the largest conferences of the year, and on the night that Barrick hosted a cocktail event at a club downtown, Bristow flew to New York to meet Goldberg for dinner.
“Effectively Newmont has lower grade ore (in Nevada) and very significant infrastructure,” said Bristow. “But the ounces are similar and Barrick has high grade ore bodies and lots of growth, but it would have to put that infrastructure in, and there immediately is the synergy.”
On Monday, they announced the terms of a joint venture: Barrick would drop its hostile bid and both parties agreed to a two-year standstill that prevents hostile bids. And they will create a joint venture to share assets, with a projected cost savings of US$500 million per year or US$5 billion over the next 20 years.
Many analysts have speculated that Mark Bristow never believed his audacious bid for Newmont would succeed.
But all the details of those cost savings haven’t been spelled out. Some savings, such as liquidating excess parts for trucks would be a one-time event, while other synergies, such as consolidating the teams that work on trucks, would create savings every year.
All synergies would not necessarily accrue equally: Barrick likely would have needed to build a roaster to process its ore and Tumazos estimated that would have cost US$700 million. Instead, it can use Newmont’s existing roaster.
“That’s a one-time saving that accrues to Barrick not Newmont,” said Tumazos, who added that the greatest benefits will likely occur in the first few years.
He said Newmont’s water rights and its political clout in the state of Nevada are difficult to value, so total synergies are tough to calculate.
Newmont, however, immediately moved the focus back to its proposed acquisition of Goldcorp and issued a proxy to shareholders to vote on that deal on the same day that it announced the JV with Barrick.
The Barrick joint venture could complicate its Goldcorp acquisition since it theoretically increases Newmont’s net asset value by making its operations more efficient. Goldcorp shareholders are now in line to receive 35 per cent of Newmont, but that’s based on its value before the JV deal was completed.
“It’s possible (Newmont) shareholders would want to re-negotiate merger terms with (Goldcorp),” Scotiabank analyst Tanya Janusconek wrote in a note earlier this week.
If the deal with Goldcorp goes through, Newmont will find itself in new partnerships with Barrick including a gold mine in the Dominican Republic and a gold and copper project under development in Chile.
That close relationship has stoked speculation that the companies will continue to contemplate further consolidation. Macquarie Capital Markets Ltd. analysts wrote that the JV was “a possible half-step on the way to an eventual bigger deal,” and there could be a friendly deal during the standstill because of the possible synergies.
Meanwhile, Tumazos, who opposes a merger, said the two companies may have to spend the next few years selling off assets from their recent mergers, depending on the gold price, which would delay any future deal.
By the end of the year, however, Goldberg will have departed. The Newmont CEO insists there was nothing unusual about the timing of his retirement, announced simultaneously with the largest gold acquisition of his career.
Goldberg also said he had been pushing for a joint venture all along, and the final deal made sense — the stakes in the joint venture were based on analysts’ consensus of each companies’ net asset values. He said that he plans to visit the Dominican Republic with Bristow this summer to review the mine there, but his main focus at the moment is the acquisition of Goldcorp.
“Once the (JV) transaction finally closes, we can get on with Barrick working to develop the synergy values they’ve promised into the market, and us supporting it,” he said, “but us really getting on with our Goldcorp transaction.”