A Barrick Gold And Newmont Mining Merger, Part 2

Aug.21.14 | About: Barrick Gold (ABX)


Barrick Gold and Newmont Mining recently broke off merger discussions.

Merging these two companies into one doesn't solve the negative shareholder return.

Barrick and Newmont need a different plan to unlock shareholder value.

Creating three companies by merging two, instead of merging two companies and creating one is a better plan.

Over $11 billion in shareholder value is unlocked.

In Part 1 of this article, I discussed why a merger of Barrick (NYSE:ABX) and Newmont (NYSE:NEM), creating one company in the process, wasn't a good idea. To unlock shareholder value, the companies need to better align all of these assets and form three separate companies instead. Part 2 focuses on Barrick/Newmont Central and South America, as well as Barrick/Newmont Africa and Australia. I will also wrap up both Part 1 and Part 2 and show how this all comes together.

Barrick/Newmont Central and South America

What Barrick brings to the table:

  • Lagunas Norte
  • Pascua-Lama
  • Pueblo Viejo (60%)
  • Veladero
  • Zaldívar

What Newmont brings to the table:

  • Yanacocha(51%)
  • Conga
  • Merian


Let's first take a look at the projects of Barrick/Newmont Central and South America. Pascua-Lama is located on the border of Chile and Argentina, at an elevation of 3,800 to 5,200 meters, and is approximately 10 kilometers from Barrick's Veladero mine.

Pascua-Lama is a fantastic project, but it's been a disaster to build. Lloyd O'Carroll, an analyst at Davenport & Co., said this about it back in 2011: "It's the most difficult project in the world, on top of the Andes, so it's probably going to take longer to get into production, but it's a very good deposit."

It contains one of the world's largest gold and silver resources, with more than 15 million ounces of proven and probable gold reserves, and 675 million ounces of silver contained within the gold reserves. Annual production in the first full five years is expected to average 800,000 to 850,000 ounces of gold and 35 million ounces of silver, at cash costs of under $200 per ounce of gold. The expected mine life is 25 years.

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(Source: Barrick Gold)

During Q4 2013, Barrick announced the temporary suspension of construction at Pascua-Lama. The ramp-down process has been completed on schedule and budget, and the project is now on care and maintenance.

Barrick said a decision to restart development will depend on improved economics and reduced uncertainty related to legal and regulatory requirements. Barrick continues to explore opportunities to improve the project's risk-adjusted returns, including strategic partnerships or royalty and other income-streaming agreements.

Newmont also owns two large projects in South America, those being Conga (Peru) and Merian (Suriname). Newmont just announced that the Merian gold mine is a go, with strong local support for the project. The new mine is expected to begin production in late 2016, and the total capital investment is approximately $900 million to $1 billion. The government of Suriname has the option to earn a 25 percent fully-funded equity ownership stake.

Merian contains gold reserves of 4.2 million ounces, and is expected to produce an average of 300,000 to 400,000 ounces of gold annually over a mine life of 11 years. Annual production will average 400,000 to 500,000 ounces of gold per year in the first five years, with expected all-in sustaining costs of between $750 and $850 per ounce.

Conga is very close to Yanacocha, but has been held up due to local opposition to the mine. Conga contain 6.5 million ounces of gold in reserves.

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(Source: Newmont Mining)

A closer look at the economics of Conga:

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(Source: Newmont Mining)

Combined Production

Barrick/Newmont Central and South America would currently produce 2.26 million ounces of gold at an AISC of $794 per ounce. It would also produce 279 million pounds of copper per year.

Barrick/Newmont Central and South America (Gold)
2013 Production 2013 AISC Reserves (ounces)
Lagunas Norte 606,000 oz $627 per oz 3.75 million
Pueblo Viejo (60%) 488,000 oz $735 per oz 9.7 million
Veladero 641,000 oz $843 per oz 5.1 million
Yanacocha (51%) 525,000 oz $983 per oz 3 million
Total 2.26 million oz $794 per oz 21.55 million oz
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Barrick/Newmont Central and South America (Copper)
2013 Production 2013 AISC Reserves (pounds)
Zaldívar 279 million pounds $1.94 per pound 6 billion
Total 279 million pounds $1.94 per pound 6 billion
Click to enlarge


As far as a valuation, I'm using current production and AISC figures, along with a 40% tax rate due to the higher taxes in these regions.

Barrick/Newmont Central and South America Valuation
Annual Gold Production 2.6 million ounces
AISC $794 per ounce
Tax Rate 40%
Annual Copper Production 279 million pounds
AISC $1.94 per pound
After-Tax Profits ($1,300 gold and $3.25 copper) $1 billion
Market cap at P/E of 12 $12 billion
Market cap at P/E of 15 $15 billion
Click to enlarge

There would also be the three substantial projects that the company would own. Those being Pascua Lama, Merian, and Conga. Those could add 1.4-1.5 million ounces of gold per year at extremely low-cost production. The company would need about $6.5 billion to complete these. I'm also assigning no valuation to these projects, again, being very conservative.

Barrick/Newmont Africa and Australia

What Barrick brings to the table:

  • Cowal
  • Kalgoorlie (50%)
  • Porgera (95%)
  • Lumwana
  • Jabal Sayid (50%)

What Newmont brings to the table:

  • Boddington
  • Kalgoorlie (50%)
  • Tanami
  • Waihi
  • Ahafo
  • Akyem


Barrick owns 50% of the Jabal Sayid copper project in Saudi Arabia. First production is expected in late 2015, with average annual output of 100-130 million pounds of copper in concentrate at first quartile at C1 cash costs during its first full five years of operation.

Combined Production

Barrick doesn't operate any gold mines in Africa, as it spun them off into African Barrick Gold a few years ago. It's probably a good thing, as ABG's mines are very high-cost. Newmont's Akyem mine ramped up in 2013, so as noted below, its production and AISC are based off 2014 guidance. Also, Barrick and Newmont both own 50% of Kalgoorlie, so now it's 100%.

Barrick/Newmont Africa and Australia
2013 Production 2013 AISC Reserves (ounces)
Boddington 743,000 oz $1,222 per oz 13.6 million
Cowal 297,000 oz $746 per oz 1.8 million
Kalgoorlie 630,000 oz $914 per oz 7.4 million
Porgera (95%) 482,000 oz $1,294 per oz 3.1 million
Tanami 325,000 oz $950 per oz 3 million
Waihi 100,000 oz $1,000 per oz 220,000
Ahafo 570,000 oz $873 per oz 10.1 million
Akyem* 465,000 oz $388 per oz 7.2 million
Total 3.6 million oz $948 per oz 46.4 million oz
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*2014 production and AISC

Barrick/Newmont Africa and Australia (Copper)
2013 Production 2013 AISC Reserves (pounds)
Lumwana 260 million pounds $2.97 per pound 6.6 billion
Boddingtion 66 million pounds $2.75 per pound 1.5 billion
Total 326 million pounds $2.93 per pound 8.1 billion
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Barrick/Newmont Africa and Australia Valuation
Annual Gold Production 3.6 million ounces
AISC $948 per ounce
Tax Rate 40%
Annual Copper Production 326 million pounds
AISC $2.93 per pound
After-Tax Profits ($1,300 gold and $3.25 copper) $823 million
Market cap at P/E of 12 $9.9 billion
Market cap at P/E of 15 $12.3 billion
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How It All Comes Together

The Debt

Barrick and Newmont have a lot of debt between them, and this has been an overhang for both stocks. The companies need to lessen the debt burden.

Total Debt Total Cash
Barrick $13 billion $2.5 billion
Newmont $6.7 billion $2 billion
Total $19.7 billion $4.5 billion
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The Equity Raise

When these three companies are spun off, they need to do a 10% equity raise. This dilutes shareholders, but we are still unlocking a lot of shareholder value.

Market Cap 10% Equity Raise
Barrick/Newmont Nevada $23.6 billion $2.36 billion
Barrick/Newmont South and Central America $15 billion $1.5 billion
Barrick/Newmont Africa and Australia $12.3 billion $1.23 billion
Total Cash Raised $5.1 billion
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Asset Sales

Equity raises aren't the only thing on the agenda. I also purposely left out several assets that Barrick and Newmont own. Those being Donlin Creek, Golden Sunlight, Hemlo, Cerro Casale (75%), La Herradura, and Batu Hijau.

I don't think most of these fit in with the plan. Donlin Creek could be sold off to Goldcorp (NYSE:GG). Golden Sunlight has a short mine life and is located in Montana, so it doesn't really fit in. Hemlo still produces 200,000 ounces per year, but is the only Canadian mine that Barrick owns. Newmont has no assets in Canada. Cerro Casale is a huge copper-gold project in Chile, but Barrick/Newmont Central and South America has plenty of big projects on its plate. La Herradura is a nice 200,000 per year gold mine in Mexico, but it would be better to sell it and focus on bigger projects. Batu Hijau has been a thorn in Newmont's side recently. It's still a substantial copper producer, but Newmont might be better off just monetizing it.

I think these 6 projects could net $2 billion in total, and that is being extremely conservative.

The End Result

After the equity raises and asset sales, the total debt is reduced to $12.6 billion, with $4.5 billion still in cash. We will leave it up to the accountants as to which companies have what amount of debt, but let's just say we split it evenly between the three. Cash and debt. That's $1.5 billion in cash and $4.2 billion of debt for each one. When you factor in the billions and billions of property, plant, and equipment of these three companies, as well as the annual operating cash flow from each one, a $4.2 billion debt balance with $1.5 billion in cash is very reasonable.

How much shareholder value did we unlock?

In my valuations for each company, I assigned no value to current projects. I also used relatively low P/Es of 12 and 15. Given how conservative I was, I'm going to assign the higher P/W of 15 to each of these companies. I don't think I'm being generous. I should also point out that Barrick is trading at a P/E of 15, using 2014 production guidance and AISC figures.

Barrick/Newmont Nevada $23.6 billion
Barrick/Newmont Central and South America $15 billion
Barrick/Newmont Africa and Australia $12.3 billion
Total $50.9 billion
Click to enlarge

Barrick and Newmont currently have a combined market cap of $35.1 billion. If you factor in the 10% dilution from the equity raises of the three newly formed companies, the total shareholder value that has been unlocked is almost $11 billion.

Why This Would Work Better

Barrick and Newmont have spent 15 years trying to build the largest gold companies in the world, and they succeeded. But for investors, they have failed miserably. No shareholder return over 15 years speaks volumes, and negative shareholder return if you adjust for inflation.

The top brass at the two companies have had their chance, it's time for something different. Will Barrick and Newmont ever do something like this? Don't count on it. The two companies are so attached to their assets that they can't focus on the big picture. They wouldn't dare break apart some of these. But that is exactly what they need to do. Again, they have tried it their way, and it hasn't worked.

Three separate companies not only streamlines operations, but it also makes it easier for investors to understand. Could you imagine if Barrick and Newmont did merge, yet didn't spin off any projects/mines? It would be overwhelming to digest this company's assets.

Sometimes bigger is better, sometimes it's not. In this case, it's not.

Also, merging the two into one doesn't solve the debt issue. They could always issue more equity as part of the merger, but at current valuations, this would be unfair for shareholders.

Keep in mind, I'm looking at what's best for shareholders, and this alternative plan is what's best. I personally think it's better for the companies too.

Aligning the operations into these three separate companies allow for cost efficiencies, better focus, and a more streamlined business. It substantially reduces the debt that is a huge burden for Barrick and Newmont. It also takes away the overhang of a few mines/projects that are affecting Barrick's and Newmont's entire valuations.


Barrick and Newmont have been trying to come together in one big merger deal. But this would do nothing to unlock shareholder value. Both companies have produced a negative shareholder return over the last 15 years, if you adjust for inflation.

It's time for a different plan, one that awards shareholders. Merging the two companies and creating three is the better plan. It would unlock $11 billion in shareholder value.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.