February 22, 2019 / 11:45 AM / 3 months ago

Breakingviews - Barrick gamble is one part logic, two parts folly

An open pit at Barrick Gold Corp's Veladero gold mine is seen in Argentina's San Juan province, April 26, 2017. Picture taken April 26, 2017. REUTERS/Marcos Brindicci - RC1EF5329E60

SINGAPORE (Reuters Breakingviews) - Barrick’s latest gamble looks like fool’s gold. The Canadian giant is eyeing a bid for its $19 billion U.S. rival Newmont Mining, the Globe and Mail reported on Friday, a tie-up which has been mooted before and could yield synergies. But the buyer has just acquired Randgold Resources, the target is buying Goldcorp, and investors in the sector are wary of scale for the sake of it.

After a dearth of deals, gold mergers are, like London buses, suddenly appearing all at once. Some four years after its deal with Newmont was scrapped, Barrick announced in September it would merge with Africa-focused Randgold, bringing in much-needed ounces and a respected management team. Newmont then announced a few months later it would tie up with Goldcorp. That seems to have triggered alarm bells at its on-off suitor.

None of the miners have yet commented. But a wager of this scale would not be beyond the ambitions of Barrick’s Chairman John Thornton, a former Goldman Sachs banker. He may have plugged a production gap with Randgold, but would prefer to grow further. Joining forces with Newmont in Nevada would mean cost synergies too, a rarity in mining deals.

In practice, much of that logic dissipates. The industry’s reputation is still recovering from a bout of terrible expansions and acquisitions that destroyed billions of dollars. Barrick may have been responsible for one of the worst, with the acquisition of Equinox Minerals in 2011, later largely written off. Its investors may find two major deals in quick succession a little too much.

Given the terms of their deal with Goldcorp entail handing over some value to the target’s shareholders, Newmont’s own investors may be more positive about a Barrick tie-up. But Newmont bosses would still be reviving a deal scrapped after the two sides could not agree on basics like who would run the company. Hostile deals have a poor success rate in the sector. Victory would require a significant premium, even a cash component, added to an already eye-watering breakup fee which the newspaper put at $650 million.

Bringing in Newcrest Mining to buy Newmont’s Australian mines would take some pressure off: it needs extra output, and may consider a good offer. But even with recovering gold prices, this boom-era deal may be a little too much.

Breakingviews

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