By Marcus Falck, Niclas Hallberg, Oscar Kock and Samuli Karjalainen (SSE & LSE) - Date: 02/02/2019
Overview of the deal
Acquirer: Newmont Mining Corp (NYSE:NEM)
Acquirer Advisors: BMO Capital Markets, Citi, Goldman Sachs & Co
Target: Goldcorp Inc. (NYSE:GG)
Target Advisors: Bank of America Merrill Lynch, Fort Capital Corp, TD Securities Inc
Deal value: $9.96bn
Announcement date: January 14, 2019
What was supposed to be a casual dinner in a restaurant in downtown Vancouver between the executives of Newmont and Goldcorp, turned out to be the starting point for the largest acquisition ever in the gold industry. With negotiations lasting just over a month under the code-name Altitude, the merger will give Newmont and Goldcorp shareholders a 65% and 35% interest respectively in the newly formed entity. Being mainly a stock-swap transaction, offering 0.328 Newmont common shares per Goldcorp share, an additional $0.02 was paid in cash per Goldcorp Share, which represents a 17% premium based on Goldcorp’s 20-day VWAP. The merged entity will be known as Newmont Goldcorp.
This merger comes four months after the mining industry’s latest big announcement, the mega-merger of competitors Barrick Gold Corp and Randgold Resources in an all-share deal worth $6.5 billion. With the gold sector still relatively fragmented, production reserves among senior miners declining worldwide and widespread investor concern, the purpose of the deal is for Newmont and Goldcorp to strengthen and create an unmatched portfolio of operations and assets located in favorable jurisdictions in the Americas, Australia and Ghana, 75%, 15%, and 10% respectively. The merged company will have the world’s largest production and reserve base, with enough liquidity and diversified assets to attract investors.
“All industries consolidate when they shrink. So I could see this coming for a while. We were looking at how is the best way to participate in this consolidation at a time when our stock price was underpressure.” - Ian Telfer, Goldcorp, Chairman of the Board.
Company details (Newmont Mining Corporation)
Newmont Mining Corporation is a mining company, which is focused on the production of, and exploration for, gold and copper. The company is primarily a gold producer with operations and/or assets in the United States, Australia, Peru, Ghana and Suriname.
- Founded in 1921, headquartered in Greenwood Village, Colorado, USA.
- President and CEO: Gary Goldberg
- Number of employees: 12,547 (2017)
- Market Cap: $17.7bn EV: $19.7bn
- LTM Revenue: $7.1bn LTM EBITDA: $2.3bn
- LTM EV/Revenue: 2.8x LTM EV/EBITDA: 8.5x
Company details (Goldcorp Inc.)
Goldcorp Inc. is a gold producer engaged in the operation, exploration, development and acquisition of precious metal properties in Canada, the United States, Mexico, and Central and South America. The company is involved in the sale of gold, silver, lead, zinc and copper.
- Founded in 1994, headquartered in Vancouver, Canada
- President and CEO: David Garofolo
- Number of employees: 7,079 (2017)
- Market Cap: $9.4bn EV: $12.4bn
- LTM Revenue: $3.1bn LTM EBITDA: $1.1bn
- LTM EV/Revenue: 4.0x LTM EV/EBITDA 11.3x
Projections and Assumptions
Short term consequences
Though the merger’s intents were to increase shareholder value, investor attitude has been ambiguous towards the announcement. Newmont’s share price fell 8.9% – wiping off more than $2bn of Newmont’s market value – most likely due to the premium paid, and thus the overvaluation of the target’s assets. Goldcorp, at the same time, experienced a surge in share price equivalent to 7.5%. However, the proposed synergies of the merged entity might explain both companies’ continual increase in share price, following the immediate reaction.
Along with the NewCo regaining its position as market leader, after the Barrick-Randgold merger swiftly put that company ontop of the industry, they have also announced they will offer the highest annual dividend among senior gold producers, targeting $0.56 per share. Furthermore, Newmont Goldcorp’s plans to sell off mines that do not qualify as having an IRR of at least 15%, will contribute to a more profit-oriented enterprise, which possibly can create value for shareholders. This strategy of divesting unprofitable assets amounts to mines worth $1–1.5bn that will be sold off over the next two years and mirrors a similar action taken by competitor New Barrick (the combined entity of Barrick and Randgold) that plans to sell mines that do not qualify as Tier One assets.
This strategy of focusing on the most profitable mines, located in favorable jurisdictions, might prove to be a fruitful strategy, considering the risk that is involved when acting in less favorable mining jurisdictions. For instance, Goldcorp has a history of struggling with certain past projects, one example is with their Cerro Negro project in Argentina in 2015, where they had to write down the value of the project by $2.3bn due to political and economical challenges in that country.
Besides synergy-capture, the rationale behind this deal may have been to provide a lifeboat to a sinking ship. Goldcorp’s development over the past several years has been lackluster, having been the largest gold company by market capitalization in 2013, by November 2018 the company’s shares were trading at a 17-year low and the market cap had plunged to approximately $10bn from a peak of $23bn. Considering this alongside the general consolidation of the industry, this mega-deal might have been inevitable in order to ensure the company’s survival in a rapidly evolving industry.
Long term upsides
With the deal, Newmont Goldcorp will ensure its position as the world leader in gold mining, snached from Barrick Rangold who took that position last autumn. Newmont Goldcorp expects to have an annual production of 6 to 7 million ounces compared to Barrick Rangold’s 4.5 to 5 million ounces. Newmont Goldcorp’s leading position in gold mining will bring them a wide range of synergies as well as potential upside, especially if the price of gold keeps going up.
Rising gold prices are not too out of reach. As a wide range of traditional signs of recession, such as flattening US yield curve, record-low US unemployment rate and tightening US high yield credit spread, flash red, a jump in the price of gold may be just around the corner. Besides the United States, PMI’s have been in a sharp decline in the Europe, political risk across the globe keeps investors busy and smart money flows out of funds at a heightened rate. As such, because gold is traditionally seen as safe haven for investors wanting to add an uncorrelated asset to their portfolio, this mixture of risks bodes well for the near-future demand for gold as a hedging tool.
In the long term, Newmont Goldcorp expects $100M annual pre-tax synergies. In Newmont’s and Goldcorp’s press release, the president of the NewCo, Gary Goldberg, stated that the synergies are expected to cause the deal to be “immediately accretive to Newmont’s net asset value and cash flow per share”. The synergies he refers to are that due to cost cutting and revenue synergies, which are often realised more in the longer term.
The consensus is that Goldcorp’s subpar performance in the past few years is mainly due to management issues. While Goldcorp has been in decline since 2011, Newmont has been thriving. In the new company, Ian Telfer (Chairman of Goldcorp) has been named deputy chairman, but no one else from Goldcorp has been announced as part of the new leadership team. In this year’s fourth quarter, the current CEO of Newmont, Gary Goldberg, will replace Goldcorp’s CEO Tom Palmer. As a result of this managerial transition, Newmont Goldcorp will target to leverage the strengthened portfolio of operations, projects and explorations opportunities that come with the merger, while simultaneously functioning under Newmont’s successful management team.
Risks and Uncertainties
Even though the price tag of EV/EBITDA of over 11 times seems fairly expensive when the sector average is 8.15, it’s important to consider that valuations in the commodity industry can fluctuate quickly on the back of rapid appreciations in the relevant commodity, in this case gold. Consequently, the discussion about the price paid revolves a lot around the future price of gold, which, perhaps unsurprisingly, also brings major upside potential to the acquisition. If the price of gold increases, it has a double-effect on gold miners’ profitability as it doesn’t only increase the price from gold that has already been mined but it also makes new areas profitable to mine. On the other hand, this effect works the other way around as well, and it is not difficult to see the deal turning out to be very expensive if the price of gold starts heading south.
The divestiture of assets that cannot generate a 15% IRR is signaling the more profit-oriented and risk averse strategy of Newmont Goldcorp. However, due to the fact that there are limited amount of natural resources to mine, to inhibit exploration activities outside favorable jurisdictions might prove a difficult long-term path to pursue. When the assets in Newmont Goldcorp’s portfolio start to run out, the risk-averse strategy might paradoxically be more risky. When this happens, they will need the operational know-how to act outside their favorable jurisdictions because competitors will also do this. Thus, the implied risk of being too big of an actor in a stable market and ceasing the exploration of new opportunities, might turn out be a costly position to hold.
Aspects of future best management practices can also turn out to be tricky, as Newmont’s current CEO Gary Goldberg is to step down at the end of 2019 and Newmont’s current COO Tom Palmer will take over. Whether the post-merger integration is anywhere near ready at that point remains to be seen. As usual, there is also the possibility of cultural clash between the companies’ management teams, but the companies have agreed to appoint the NewCo’s management team by “best-talent basis”, which, in other words, means that Newmont will have possession of the majority of the leading positions. Finally, the deal is subject to regulatory approvals in many areas, including the EU, Canada, Mexico and South Korea. Even though the Barrick-Randgold merger got approved, the risk of anti-trust issues exists, as this deal would create the biggest entity in the sector.
“When an industry starts to consolidate, it happens quicker than people think. It is like musical chairs. You better find the best partner you can and get something done, because when partners are gone, they are gone.” – Ian Telfer, Goldcorp, Chairman of the Board.
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