Barrick’s empire building deserves skeptical eye

April 21, 2014

By Kevin Allison
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Barrick Gold’s interest in a $33 billion merger with rival Newmont Mining deserves a skeptical eye. The world’s top gold miner by ounces produced is keen on a deal with the industry No. 2, according to news reports. Barrick’s outgoing founder and chairman, Peter Munk, admitted to “hubris” in past deals. Ex-Goldman Sachs banker John Thornton, who takes over next month, faces a considerable challenge convincing shareholders this won’t be another value-destroyer.

Munk, who is set to yield the chairman’s title to Thornton on April 30, recently lamented Barrick’s $7.7 billion purchase in 2011 of Australian copper miner Equinox. That deal, which came at a 30 percent premium to the target’s stock price, added to Barrick’s debt load and led to a big writedown after copper prices declined.

A few things could make this deal different. Investors have long speculated about the merits of a Newmont-Barrick deal. And after a sharp correction in the gold price, Barrick is said to be offering Newmont a more modest premium – about 13 percent above the company’s 20-day average share price, according to Bloomberg – all in shares.

And there’s a chance investors may value the combined company’s lower-cost U.S. assets more if they’re separated from the riskier overseas mines – an aspect of the merger talks that may or may not come to fruition. Meanwhile, potential synergies of $1 billion look ambitious.

Taxed and capitalized, these savings might be worth $6 billion to shareholders, based on a blend of the two companies’ tax rates – or just under a fifth of the combined group’s market cap. Capturing big synergies has proven difficult in past mining mergers. The close proximity of Newmont’s and Barrick’s flagship Nevada mines may make it easier for them to achieve.

The bigger issue is existential. Munk’s Equinox mea culpa seemed to suggest that Barrick was done with empire building. The worry now must be that former banker Thornton will push for even more deals. Along with spelling out how the company plans to make a potential Newmont deal pay, Thornton needs to reassure that Barrick has learned something from past hubris.

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