Stock Watch – Michael Sprung on Barrick – Newmont Merger

Stock Watch – Michael Sprung’s first take on the proposed Barrick Gold Corp. and Newmont Mining Corp merger

Stock Wathch Michael Sprund BNN Barrick Newmont merger dilutive Barrick shareholders

Michael Sprung on BNN – Proposed Barrick and Newmont merger is slightly dilutive to Barrick shareholders

Michael’s first take on the proposed Barrick Gold Corp. (TSE:ABX, Mkt cap 22.28B, P/E – , Div/yield 0.06/1.16, EPS -10.61,Shares 1.16B) and Newmont Mining Corp (NYSE:NEM, Mkt cap 12.56B, P/E – , Div/yield 0.15/2.40, EPS -5.06, Shares 502.93M) merger:

  • Proposed Barrick and Newmont merger is slightly dilutive to Barrick shareholders, a slight premium to Newmont shareholders;
  • Given the decline in the price of gold and cost escalations, we would expect to see more mergers in the industry;
  • We will not know if this is a good deal until a year out;
  • Will they be able to achieve the proposed cost synergies?
  • Deal is somewhat credit negative – debt to jump to $15B from $10B, net debt to EBITDA will approach 2 times;
  • We hope the merged entity will retain a Canadian head office.

Michael Hainsworth:  Michael Sprung is at Sprung Investment Management, at TSX for us today and he joins us for his take. Is this a good deal? Should this deal go through?

Michael Sprung:        With these mega deals, it’s often very hard to say from the outset if this is a good or a bad deal. I think what we are seeing in the market today is the reaction that on the surface this is slightly dilutive to Barrick shareholders, and you are in fact getting a small premium to the Newmont shareholders.

But this is the sort of environment where you expect to see this kind of merger. I think we are going to see more mergers in the sector given the price of gold and the massive cost escalations that we have seen on the capital expenditure side and cost of goods sold and so on.

So I think that nobody will know if this is a good deal until it’s done and the paperwork is done; in a year or so out we can reflect back and say, were they able to achieve these cost synergies.

To me, this is the key to this deal. They are talking about a billion dollars in cost synergies; most of that in Nevada. Well, in Nevada, if they are spending a combined, what is it, about half a billion a year in capital expenditures and cost of goods sold, well, actually it’s about 4.3, we are talking about substantial, substantial savings, which on the surface appear a little bit aggressive, and so it’s going to remain to be seen.

The second component of course is on the Spin Co; well, they achieve the valuation for that this is necessary to make the metrics of this transaction work. When we look at Barrick, initially going into this, this is somewhat credit negative. We can see debt going up to around 15 billion from just over 10, and net debt to EBITDA approaching two times.

Then if they achieve these cost savings, all these things come more into line and we will have a stronger company.

This is not new. Some time ago Mr. Monk was musing on a possible combination with Glencore. So I think there are going to be some big mergers. As a Canadian I hope that they maintain the head office in Canada. It would be good to have a remaining major global miner in Canada. We have lost so many over the years. So I am hoping that that part of it gets worked out.

But there is a lot of things that we don’t know and I think that there is a lot of fine details that they have yet to work out.

On balance, this deal is not being done for diversification by any means. I mean, these are two strong gold mining companies with some copper assets, but I think what it’s really setting them up is to make it a stronger force to take advantage of more of the M&A activities that may be coming up in the next period. And I think they would be a formidable force in the industry.

Michael Hainsworth:  Michael, to your point about premiums, at a 13% premium, that doesn’t seem to be as much as some had wanted or expected, but having said that, is that a reflection of the fact that gold is 20% off its highs?

Michael Sprung:        Oh, I think to a great extent it is. When gold is really moving and the market is moving quickly, premiums tend to go up in overestimation of all the great things that are yet to come. So I think the current environment is a good one from a shareholder’s perspective to see mergers taking place, because you don’t see the crazy kind of premiums that often take place in more frothy markets.

Michael Hainsworth:  Michael, great having you with us! Thank you for your insight!

Michael Sprung:        Thank you!

Michael Hainsworth:  Michael Sprung is President of Sprung Investment Management. He joined us from the TSX Broadcast Centre.

See Michael discuss the proposed merger with Michael Hainsworth on BNN here>>