B arrick Gold must find the "Gold" in its name a hindrance. That's because the industry leader is always plotting ways to stuff the mining portfolio with non-gold goodies. A couple of years ago, it thought seriously about buying oil sands powerhouse Suncor. Then it thought about Inco. Each time, it had to remind itself: Hold on, we're a gold company. Investors don't like it when gold companies risk diluting their high valuations with grubby base metals.
Barrick's hesitation did not stop the lunge into copper, and therein lies the problem. In 2006, copper sales were 20 per cent of gross sales and 31 per cent of gross profit, thanks to robust copper prices. Copper's relative weighting will probably rise as production climbs from 376 million pounds in 2006 to this year's expected 400 million pounds. If it keeps up, watch out. Even as Barrick's cash flow and profit rises, the company's valuation could fall as its gold multiple comes under pressure. Typically, gold companies trade at about two times net asset value (NAV); copper, nickel and zinc diggers trade between 1 and 1.5 times NAV.
Which brings us to the latest rumour, care of BusinessWeek, that Barrick might offer to buy Denver's Newmont Mining, the second-largest gold player. The report even mentioned a mid-$50s (U.S.) price. In response, Newmont shares rose a buck to $43 and change, valuing the company at $19.4-billion. Barrick shares fell a few cents to $28, giving it a market worth of $24.2-billion.
Barrick's alleged interest in Newmont seems unlikely in some respects. Newmont, while smaller, would still be a monster takeover, and, depending on the takeover premium, potentially dilutive to earnings as millions of new shares are hosed out to pay for the brute. It suffers from falling production, rising costs and a profit margin that hasn't climbed as fast as gold prices. In spite of yesterday's pop, the shares are off almost 5 per cent since the start of the year. Newmont seems the classic case of mining company that is too big to grow, a giant on wobbly legs.
So what's to like? A lot, chiefly the simple fact that Newmont is a big gold company. If Barrick wants to indulge its non-gold fantasies and not crunch its gold multiple, it must buy more gold to reduce the relative exposure of the non-gold assets, notably copper, but also silver, nickel and platinum. More gold equals more opportunity to buy non-gold (Newmont has considerable non-gold interests too, in oil sands and iron ore, but they're tucked away in the Newmont Capital merchant bank, the home of Seymour Schulich and Pierre Lassonde, Newmont's vice-chairman and past president).
Newmont last year had 93.9 million ounces of proven and probable gold reserves. Barrick took the No. 1 position, with 138 million ounces, last year when it brought Vancouver's Placer Dome for $10-billion. Put the two gold portfolios together, manage them well and the Barrick boys, led by chairman Peter Munk and CEO Greg Wilkins, could play with all the copper and nickel toys they want.
There's more. The synergies - the polite term for cost reduction and firing a lot of employees - are compelling. In Nevada, Barrick (with Placer at its side) and Newmont have just short of a dozen adjacent or nearby gold properties. Put them together and the savings, insiders say, could range from $250-million to $500-million a year. The problem is that Barrick and Newmont, like Inco and Falconbridge in Sudbury, Ont., have yakked about rationalizing their Nevada operations for years with nothing to show for it. The solution may be the merger of the two companies.
Have Newmont and Barrick talked about joining forces? We don't know and neither company is commenting on the speculation. But it's hard to imagine the topic hasn't come up, especially since Wayne Murdy, Newmont's CEO since 2001, is approaching retirement with no obvious successor. Gold companies are obsessed with size. You can bet Mr. Wilkins would love to create a rival to BHP Billiton, the world's largest mining company.
Ditto Mr. Munk. Last year, he watched in disgust as Inco and Falconbridge failed to complete their merger, leaving both companies sitting ducks for foreign buyers. "It requires balls, it requires guts, it requires vision," he said to reporters in September as Inco and Falconbridge were being eradicated from Corporate Canada. "Look at the opportunities Inco and Falconbridge had. They only wake up when every goddamn foreign company wants to buy them. Why react? Why not act?"
Mr. Munk may act one more time, partly out of zeal to solidify Barrick's position atop the gold mining heap, partly to create a Canadian champion and partly because Barrick needs more gold so it can buy more non-gold. Newmont shares are about 27 per cent below their 52-week high of $59.70. Its production will begin to climb again next year. This may be an opportune time to buy.
ereguly@globeandmail.com