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Morningstar | Barrick Makes Unsolicited Bid for Newmont, but Potential Deal Faces Many Challenges in Current Form

After confirming news that it considered an acquisition of Newmont on Feb. 22, Barrick Gold formally announced an unsolicited bid on Feb. 25. Barrick's all-share offer contains no premium at an exchange rate of 2.5694 Barrick shares for each Newmont share. At Barrick’s current share price, the offer price is roughly $32 per share, which is a 16% discount to our fair value estimate for Newmont but roughly within fair value range due to our very high uncertainty rating.

Given Newmont's resistance thus far and uncertainty on what the ultimate outcome may be, we’re leaving our fair value estimates unchanged. Barrick's fair value estimates remain at $12 and CAD 16 per share. Newmont’s $38 per share fair value estimate and Goldcorp’s fair value estimates of $11 and CAD 14.50 per share remain intact. We assume the merger will close as announced. All companies retain their no-moat ratings. We would revisit our fair value estimates if Newmont shareholders appear favorable to the deal in the coming weeks. Given that Barrick's offer price is roughly at Newmont's fair value, we'd anticipate only a change to Goldcorp's fair value.

A potential Barrick-Newmont combination is compelling given Barrick’s estimate of over $7 billion in synergies on a net present value basis. Barrick management admitted that most of these synergies would occur in overlapping Nevada assets.

Newmont management has countered Barrick’s proposal with two major arguments. First, massive synergies could be realized through a joint venture of the assets in the region rather than an all-out acquisition. Second, even though it includes market reaction to the rumored merger, the exchange rate now implies a negative premium to Newmont shareholders. Newmont shares rose after the rumored Barrick bid, which suggests the market thinks a higher offer will come. Another major challenge is the $650 million break-up fee Newmont would have to pay Goldcorp to cancel that merger in favor of the Barrick proposal.

The potential value that could be unlocked from the combination of Newmont and Barrick assets is hard to argue with, as there is redundant overhead that could be eliminated and operational efficiencies unlocked given the proximity of the very large, prolific mines. However, Newmont shareholders may want to see these synergies through an offer price premium. As the saying goes, “a bird in the hand is worth two in the bush.” Yet, investors could potentially be more willing to forgo a premium if they are shareholders of both Barrick and Newmont.

As we discussed in our Feb. 22 note, Barrick’s proposed acquisition is complicated by Newmont’s ongoing acquisition of Goldcorp, which is currently expected to be completed in the second quarter. Newmont Goldcorp would be the largest gold miner in the world, producing 7 to 8 million ounces annually at all-in sustaining costs (AISC) of more than $900 per ounce. Having recently acquired Randgold, Barrick will produce 4 to 5 million ounces annually at AISC of roughly $900 per ounce.

As we had anticipated, Barrick’s offer requires Newmont to cancel its acquisition of Goldcorp and pay the $650 million break-up fee. Representing 3% of Newmont’s current market cap, the break-up fee is meaningful. However, when compared with the potential for $7 billion in synergies, the break-up fee is not insurmountable.