Castoffs in Barrick-Newmont Deal May Become $4 Billion Rival

Apr 24, 2014 9:36 am ET

(Updates with share prices in last paragraph.)

April 24 (Bloomberg) -- The Asia Pacific mines said to have stymied merger talks by Barrick Gold Corp. and Newmont Mining Corp. would rank as the world’s fifth-largest producer if spun off and be worth about $4 billion based on comparable deals.

The assets include the biggest and the oldest continuously operating mines in Australia with roots stretching back to the gold rush of the 1890s. The nine mines and assets owned by Barrick and Newmont in Australia, New Zealand, Papua New Guinea and Indonesia produced about 2.9 million ounces in 2013, and have reserves of 33.5 million ounces, according to data compiled by Bloomberg.

Newmont and Barrick’s merger talks broke down last week over disagreements on which mines to include in the spin off, according to two people with knowledge of the matter. Should an agreement be reached, the spin off could yield almost half as much gold as a combined parent company, which Barrick’s retiring chairman Peter Munk suggests could cut output to 6.5 million to 7 million ounces a year. The companies had combined production of about 12.3 million ounces in 2013, filings show.

“A potential spin off could be interesting to investors, allowing them to choose to invest in portfolios of mines more similar in geography or profile,” Kristoffer Inton, a Chicago- based analyst at Morningstar Inc. said in an e-mailed response to questions.

Merger Talks

Gold Fields Ltd. acquired three Australian mines from Barrick last year for about $300 million, paying around $115 per reserve ounce, the Johannesburg-based producer said in an August statement. The same multiple would value the nine Newmont and Barrick assets at $3.9 billion, excluding copper production, according to calculations by Bloomberg.

Discussions on a combined miner “could create a company not producing 13 million ounces, not producing 11 million ounces, not producing 8 million, we could end up producing 6.5 million or 7 million ounces,” Munk said in an interview yesterday in New York. Barrick’s founder said the two companies had discussed a tie-up on as many as five occasions and declined to comment directly on last week’s talks.

In the Asia Pacific region, the producers already jointly operate Western Australia’s Super Pit in Kalgoorlie, which has produced continuously since 1893 when a gold rush drew prospectors to the region including then-engineer Herbert Hoover, elected U.S. President in 1929.

Newmont’s Boddington mine, about 130 kilometers (80 miles) southeast of Perth, in Western Australia, had output of 704,000 ounces in 2013, making it the biggest mine in Australia, the world’s second-largest producing nation.

Outstrip Rivals

“You are looking at the two biggest Australia operations currently,” Sandra Close, director at Melbourne-based mining consultant Surbiton Associates Pty., said by phone. “It would be the preeminent producer in Australia.”

The potential spin off company would produce about as much as Australia’s three largest gold miners combined, overtaking Newcrest Mining Ltd., which had output of 2.11 million ounces in the 12 months to June 30, according to its annual report.

Other mines that may be divested in a spin off include Barrick’s Porgera in Papua New Guinea, which produced 482,000 ounces in 2013 and its Cowal mine in New South Wales state that had output of 297,000 ounces.

Newmont may include Tanami in Austalia’s Northern Territory which had output of 323,000 ounces last year, Western Australia state’s Jundee which produced 279,000 ounces of gold, its smaller Waihi gold mine in New Zealand and its stake in Batu Hijau in Indonesia, where the producer’s share of 2013 production equated to 78 million pounds of copper and 23,000 ounces of gold.

Declining Life

In its latest annual report, Newmont included 500,000 ounces of reserves and 2013 output of 56,000 ounces of gold from Regis Resources’ Duketon operations among its Asia Pacific assets. It’s the Melbourne-based producer’s largest shareholder with a 19 percent stake, according to data compiled by Bloomberg.

Yet, with operations at the Super Pit to focus on processing stockpiles after open pit mining ends in five years and with the nine assets holding reserves that are less than half of Newcrest’s 78 million reserve ounces of gold, the potential new producer may not attract all investors.

Better Value

“We just find better value elsewhere in the market place,” said Toronto-based Norman MacDonald, who manages about $1.5 billion in funds including Invesco Ltd.’s Gold and Precious Metals Fund, which holds both Barrick and Newmont shares.

African Barrick Gold Plc, created when Barrick carved out its assets in Tanzania in 2010, has lost more than half its market value since it was listed and serves as warning on any new spin off, MacDonald said. “They didn’t spin those assets into a public vehicle because they wanted other shareholders to reap huge rewards,” he said in an e-mailed response to questions. “They created the entity because the assets were dogs and hoped someone else would take them off their hands.”

Still, if the new Asia Pacific producer was priced attractively it may generate interest, said Andrew Preston, a Melbourne-based senior investment manager at Aberdeen Asset Management Ltd., which oversees about A$18 billion ($17 billion) in Australia.

“They’d have to give investors the impression that there is some uplift after the business begins to operate as a discrete entity,” Preston said by phone.

Barrick dropped 1.4 percent to C$19.33 at 9:34 a.m. in Toronto while Newmont declined 1.8 percent to $25.45 in New York.

--With assistance from Liezel Hill in Toronto.