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By Euan Rocha, Allison Martell and Nicole Mordant
TORONTO/VANCOUVER, April 21 Barrick Gold Corp
has tried and failed to buy Newmont Mining Corp
twice in the past decade, but the rationale is now more
compelling than ever for a merger between two of the world's
largest gold miners.
The two companies have been weakened by massive asset
write-downs and the derailment of two vital growth projects in
Latin America in the last two years, as the price of gold has
slid 33 percent since peaking in 2011. These issues have led to
credit rating downgrades and forced both miners to sell some
But the slide in gold also means that the value of goodwill
attached to Newmont's portfolio has tumbled, lowering the cost
of a deal and reducing the risk of more major write-downs at
Barrick should gold prices fall further.
Investors, long skeptical of big, unwieldy mining entities,
seem more open now to the view that a combined Barrick-Newmont
can generate more cash and better service its debt than the
companies can on their own.
"We suspect investors would welcome the deal, especially, if
the new company was able to use the opportunity to do serious
surgery to non-contributing assets," said JPMorgan analyst John
Bridges in a note to clients.
Barrick and Newmont had reached the broad outlines of a deal
that they had hoped to complete this month before talks hit a
snag and broke down, according to sources familiar with the
matter. Even so, the companies remain keen on reaching an
agreement and merger discussions are likely to resume, the
It has long made sense for Barrick, the world's largest gold
miner, to try to buy Newmont given the potential for cost
savings from overlapping operations. Sources familiar with the
proposed deal say it could bring nearly $1 billion in annual
cost savings, with roughly half of that coming from reducing
overlap in their vast Nevada operations.
Some argue a combined entity would also have tax advantages
as Barrick enjoys a more favorable tax treatment on foreign
earnings under Canadian law than Newmont gets under U.S. law.
The two companies first looked at the possibility of a
tie-up in the 1990s, sources say. They came close in 2008 and
2010, but ultimately disagreed about issues such as who would
serve as chairman of the combined entity.
Sources familiar with the discussions say merger talks fell
apart in the past largely due to personality conflicts. With
Barrick's co-founder, Peter Munk, about to bow out as chairman,
and new leadership in place at Newmont, the time may now finally
be right for the two miners to put aside their differences.
Munk, Barrick's incoming Chairman John Thornton and
Newmont's current Chief Executive Gary Goldberg - a former Rio
Tinto hand - all share a common vision of diversifying their
companies and building up their copper assets.
A deal could pave the way for Jamie Sokalsky, Barrick's
current chief executive, to bow out of the company gracefully.
Sokalsky has worked with Barrick for more than two decades,
serving as its chief financial officer before being named CEO
just as the company's problems began to spiral two years ago.
Sokalsky has moved quickly to cut costs, mothball
over-budget projects and bolster the miner's balance sheet via
asset sales and a huge $3 billion equity issue. Many expect him
to pass the baton after having stabilized the company.
HARD DEAL TO SELL
Toronto-based Barrick will still have to convince its
shareholders that the deal makes sense from an operational
perspective. It would have to sell or spin off some high-cost
assets and lower Newmont's cost base.
It is by no means a done deal that shareholders of both
companies will agree to a merger. Long-term investors have been
burned during the last two years as major write-downs, cost
overruns and other issues have sent their shares tumbling.
Barrick, with a market capitalization of $21 billion, is in
no position to do a cash deal for Newmont, whose market value is
just shy of $12 billion. Even though Barrick has cut debt in the
past year, its debt levels remain elevated compared with peers.
That means to buy Newmont, Barrick would have to issue a big
chunk of additional equity and win the backing of its investors.
Denver-based Newmont has forecast its all-in 2014 sustaining
cash costs in the range of $1,075 and $1,175 an ounce, while
Barrick has projected $920 and $980.
"A bigger company in and of itself is not necessarily better
and might in fact turn out to be worse than two smaller ones,"
said Chris Mancini, an analyst at the Gabelli Gold Fund, which
owns significant positions in Barrick and Newmont.
"Both companies need to prove some distinct synergies will
come from any deal before it will be approved."
($1 = 1.0989 Canadian Dollars)
(Reporting by Euan Rocha and Allison Martell in Toronto and
Nicole Mordant in Vancouver; Editing by Frank McGurty and