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Morningstar | Newmont Acquires Goldcorp for a Cheap Price, Forming the Largest Gold Miner in the World

On Jan. 14, Newmont announced the acquisition of fellow senior producer Goldcorp, which would form the largest single gold miner in the world. Combined 2017 production would have totaled 7.9 million ounces, excluding any divestments. Under the announced terms of the deal, Goldcorp shareholders will receive 0.3280 Newmont shares and $0.02 in cash for each Goldcorp share they own, which represents a 17% premium on each company’s 20-day volume-weighted average price before the announcement.

Strategically, the deal makes some sense. The pro forma company will maintain an Americas-focused footprint, which helps maintain an arguably lower geopolitical risk. In addition, Newmont has shown some recent operational successes with acquired assets, so it may be able to add better performance to the struggling Goldcorp.

We view the deal as favorable for Newmont shareholders and unfavorable for Goldcorp shareholders. As such, we’re increasing Newmont’s fair value estimate to $36 per share from $34. We’re decreasing Goldcorp’s fair value estimates to $11 per share and CAD 14.50 per share, down from $16 and CAD 21. Because we believe the transaction will be consummated as announced, we now base Goldcorp’s fair value estimates on the announced exchange rate and Newmont’s fair value estimate. We maintain our no-moat ratings for both companies.

Goldcorp has struggled in recent years with operational challenges, leading to share price underperformance relative to its gold mining peers. Nevertheless, we still see the offer price as far below our stand-alone fair value estimate of $16 per share as well as the consensus median target price of $13 per share. As a result, we think that Newmont shareholders are getting a good deal at the expense of Goldcorp shareholders.

Estimated deal synergies of $100 million represent just 2% of the combined company’s cost of goods sold and selling, general, and administrative expenses. We view the modest target as both appropriate and achievable, as most synergies will occur through corporate overhead reduction.

Newmont's and Goldcorp's deal follow's Barrick’s acquisition of Randgold last year, which we view as more attractive. Barrick completed its acquisition with a no-premium structure, addition of world-class assets, and the addition of a CEO with a strong operational track record. Although Newmont’s acquisition of Goldcorp isn’t as attractive to us, the good acquisition price is hard to argue and gives Newmont the opportunity to create value out of the deal.