Barrick And Newmont - 'Pick 3' Odds?

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Includes: ANGPY, BLK, GG, GOLD, NEM
by: Henry Miles
Summary

Barrick’s completed acquisition of Randgold, and Newmont’s announced acquisition of Goldcorp are off to rocky starts from the vantage point of investors.

However, three times normal odds for success may be in the offing because these are in-market acquisitions, creating near duopoly power, in a world rife with uncertainty.

I’ve established and will hold our positions in both Barrick and Newmont awaiting merger synergies, the effects of market domination, and gold prices to rise.

I am not a gold bug. However, about once a decade I get to thinking that it’s time to own some gold and other precious metals. The last time around, I bought in at about $1,000 an ounce and held on to $1,600 or thereabouts. I haven’t gone back to research the exact numbers, but I do recall buying a little late and bailing a little early. My vehicle of choice was/is not physicals – I have nothing buried in the back yard – but, rather, stocks in major mining companies (I'm not an ETF guy).

Platinum

First, platinum. Looking out over the Colorado River mesas last summer, I decided to move into platinum and palladium through sponsored ADR’s with one of the major miners in the world, Anglo American Platinum (OTCPK:ANGPY). For those not familiar with this Johannesburg company, it is one of a “family” of miners that own 85% of DeBeers diamonds and various other ore and base metal businesses. In platinum, Anglo American ranks #1 controlling an estimated 38% of worldwide production.

For two reasons, it took me fully four days to fill on ANGPY. First, the cell service outside Moab is so marginal that one literally must move a few feet this way or that to find a connection. (This undoubtedly has to do with the lack of towers, extreme elevations, and signals bouncing around the sandstone.) Secondly, these ADR’s only trade a few thousand shares each day. To buy prudently, with limit orders, takes patience; no place for the skittish. But fill the orders I did, and things have worked out well – up 38% in not quite 6 months.

Gold

Things haven’t worked out as well on our recently acquired gold shares. I bought Newmont (NEM) before year-end and the announcement of their intended acquisition of GoldCorp (GG). I followed with Barrick (GOLD) right after year-end when their acquisition of Randgold closed. We’re down 8% on the former and 12% on the later (but still up when considering our overall precious metals portfolio inclusive of Anglo American Platinum).

For three reasons, I believe Barrick and Newmont will work out. First, while it is well known that most acquisitions under-deliver for acquirers, “in-market” acquisitions of the type represented here tend to do better. As opposed to going off and acquiring, say, mining equipment manufacturers or interests in some far-flung industry, both Newmont and Barrick bought other gold miners. Because they know the business, the odds for successful M&A’s are good.

Secondly, investments in oligopolies tend to outperform the market as I also demonstrated in an earlier SA article. Even before their acquisitions, Barrick and Newmont dominated in gold ranked, by tons produced, as #1 and #2 worldwide. Adding the weight of Randgold and Goldcorp and, arguably, these companies have entered duopoly territory. The synergies and market leverage of these combinations should not be underestimated.

As for the third reason, absent these corporate actions, the price of gold was already rising and expected to rise further. BlackRock (BLK) the largest fund manager on earth with over $6 trillion AUM, has been raising its holdings, and a number of global banks including Goldman Sachs (GS) and JPMorgan Chase (JPM) are bullish to steady on the metal with 12-month projections of $1,425 and $1,294, respectively.

The unfortunate reality is that the world has gone half-crazy with fears over geopolitical, economic, and market risks. Fears in knowing that major countries are out of ammo both monetarily and fiscally. Fears in not knowing the stability and intentions of world leaders – Putin, Trump, Xi, Jong-un, Khamenei, take your pick. Fears driven by volatile, near-crashing markets – corporate debt, municipal bonds, equities, and forex. And, fears that recession may not be far off. BlackRock seems unwilling to peg a price target on the shiny metal, but Portfolio Manager Russ Koesterich says that, “We’re constructive on gold, we think it’s going to be a valuable portfolio hedge.”

Horseracing

I’ve been known to play the ponies (good practice for investing;). My preferred method of doing so is to buy and study all the scratch sheets and bet on a long-shot horse mentioned by only one tipster. My thinking is that such a maverick may know something that no one else does. This “system” has paid for our entertainment; I especially like sloppy tracks and betting on little-followed mudders.

If I’m feeling especially lucky (and have had a few mojitos), occasionally I will make an exotic / accumulator bet as in an exacta, trifecta, superfecta, daily double, or pick 3. For the reasons explained above, Barrick and Newmont both offer the opportunity for such bets. If they don’t “come in” on M&A synergies, they may win because of market dominance, or rising gold prices, or for two of the three, or all three, reasons. (I’m flashing back to Professor Dill who taught a course in actuarial statistics and encouraged us to apply his lessons at the Ak-Sar-Ben track, “Nebraska” spelled backwards; I prefer Saratoga.)

Given the major external variable involved – global uncertainty reflected in gold prices – and absent post-merger consolidated financials, it’s nearly impossible to predict now where GOLD and NEM will trade in the coming year. Nevertheless, as is my practice, I give you the current forecasts of the professional analysts that follow them, the tipsters if you will:

Sell Under-Perform Hold Over-Perform Buy Median Target Current Price Indicated Appre.
GOLD 1 0 18 1 6 $14.00 $11.79 18.74%
NEM 2 0 6 2 10 $39.00 $31.77 22.76%

In yet another earlier article, to minimize risk and maximize reward I admonished readers to invest for multiple reasons. Clearly, Barrick and Newmont fill the bill. To BlackRock’s conclusion that gold is a hedge, again these two companies present opportunities to own M&A synergies in heavily-concentrated gold mining in a world reeling with uncertainty. Including platinum, we now have 6% of our financial assets in precious metals. If things start to spin out of control, things may work out especially well. If not, I’m not feeling a lot of downside.

Disclosure: I am/we are long ANGPY, GOLD, NEM, BLK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Always do your own due diligence in consultation with a licensed and competent financial adviser who understands your unique needs and puts your interests ahead of their own. Remember, there are added considerations in owning foreign securities including those associated with ADR sponsorship, buying and selling the pinks, foreign withholding taxes on dividends, and fees. (All my proceeds from contributing to SA go to charity.)