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Wheaton River to merge with IAMGOLD, breaking into top 10 gold miners
By Mathew Ingram
Globe and Mail, Toronto
Monday, March 29, 2004
http://www.theglobeandmail.com/servlet/story/RTGAM.20040329.wmath0329
/BNStory/Business
According to a report in Britain's Sunday Telegraph newspaper,
Denver-based gold producer Newmont Mining is planning a
takeover bid for Toronto-based Barrick Gold -- in part because
a secret five-year standstill agreement is coming to an end.
Barrick says that this is nothing but "wild" speculation, but
there are plenty of reasons to believe that a takeover bid
isn't such a wild idea.
One of the main reasons a deal would make sense for Newmont
is that Barrick's shares look awfully cheap compared with those
of the U.S. producer, something Barrick CEO Greg Wilkins
effectively admitted even as he denied the Telegraph story.
(Newmont had no comment.) The Toronto-based company's stock
has climbed 32.5 percent over the past 12 months to about the
US$23 level but it is still relatively undervalued next to
Newmont and its other peers in the gold mining industry.
For the most part, this stems from Barrick's trying to unwind
its traditional reliance on gold hedging, whereby the miner
effectively sold its future gold production to lock in a
favourable price. While that strategy worked brilliantly when
gold prices were low, allowing Barrick to make billions more in
profit than its unhedged competitors, it penalized the company
when gold started to climb -- and investors penalized the stock.
Barrick has been trying to unwind its gold hedge "book" as
quickly as it possibly can, but it still faces potential losses
if gold prices remain high, and the market is discounting the
share price as a result. According to a recent analysis by
National Bank Financial analyst Tanya Jakusconek, in fact,
Barrick's stock price -- when valued on a price to net-asset
value basis -- hasn't been this cheap relative to those of
Newmont since about 1991.
Coincidentally enough (or not), 1991 was also the first time
the idea of a merger between Newmont and Barrick came up,
although it was far from the last. At that time, the idea
came from Newmont, then controlled by British investor Sir
James Goldsmith -- a fitting name for the controlling
shareholder of a gold-mining company. The two discussed a
US$2.5-billion merger, but after a few months of talks the
proposed deal fell apart.
Some reports said that "cultural differences" between the two
kept them from agreeing on a merger -- a phrase that in many
cases is a euphemism for a dispute over control of the merged
entity. According to some observers, Sir James didn't like the
idea of giving up his 49-percent control stake in Newmont, and
Peter Munk -- who at the time controlled 21 percent of
Barrick's stock -- didn't much like the idea of relinquishing
control either.
In the end, the two companies decided to co-operate on their
nearby mine properties in Nevada, one of the synergies that had
helped fuel the merger idea in the first place. In fact, those
types of complementary assets are one the factors that make
a combination sensible even now, Ms. Jakusconek says. The
two share a similar focus on North and South America, Africa,
and Australia and their assets in each are similar in size and
in some cases location.
After falling apart in 1991, the idea of a Newmont-Barrick
combination raised its head again in 1996, this time at
Barrick's instigation. At that point the company's annual
output was almost twice that of Newmont's, whereas in 1991
Newmont produced three times what Barrick did. By 1996
the Toronto company had become the world's third-largest
producer with output of 3 million ounces a year, thanks in
part to its purchase of Lac Minerals. But then Barrick got
distracted by a potential asset deal with doomed Bre-X
Minerals.
In 1999 both companies were trying to expand their asset
bases, in part because the low price of gold made it even
more attractive for producers to have economies of scale
-- that is, to be as big as possible, in order to spread
their costs out over a larger base. According to the Sunday
Telegraph report, at that point Barrick and Newmont also
held talks about a possible combination.
Those talks also apparently failed to reach a conclusion.
As with their first merger attempt, the companies eventually
settled for an asset swap between their neighbouring
properties in Nevada. The British report said the two
producers also agreed to a "standstill" agreement, which
put a five-year moratorium on takeover bids -- a period that
the Telegraph says will come to an end in April.
After the 1999 talks (assuming there were any) fell apart,
both Barrick and Newmont did their best to grow by other
means, primarily through acquisition. By 2002 Newmont had
become the world's largest producer with annual output of
about 7.5 million ounces, after acquiring Normandy Mining
of Australia and Toronto-based Franco-Nevada. Barrick
bought Homestake Mining in 2001 and planned an ambitious
expansion of its mines in South America and Australia that
it said would put it in first place again.
Since then, however, Barrick has been preoccupied with its
massive hedge book and has seen some setbacks at several of
its properties. At this point Barrick's production is
around the 6-million-ounce level, while Newmont is still
around 7.5 million ounces. The U.S. producer's stock,
meanwhile, trades at about 2.2 times its net asset value
according to National Bank's figures, while Barrick's stock
trades at just 1.5 times.
A Newmont takeover bid for Barrick may be far from a done
deal, but wild speculation? Hardly.
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