April 23, 2014 5:59 pm

Newmont / Barrick Gold: lustre

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Synergies – compared with valuations – may revive merger

A gold mine is a hole in the ground with a liar on top. It is not clear if Mark Twain ever said that. It is also not always true. Sometimes gold mining stocks are an honest value.

Newmont Mining and Barrick Gold, the largest gold miners, have valuations of more than twice Rio Tinto’s or BHP Billiton’s – using the ratio of price to expected earnings. Rio and BHP, diversified miners, are on 10 and 12 times, respectively; Newmont and Barrick are on 32 and 21.

That sounds heady. But in the context of the merger which Barrick and Newmont have – for now – stopped discussing, synergies must be accounted for. This brings the valuations down. About $1bn of savings have been mooted – or up to $10bn pre-tax, capitalised. Newmont’s market capitalisation is just $12bn, after a hammering in gold prices over the past year and writedowns on key projects.

Any merger might appear to offer a decent shot at creating value, then. In Nevada, where the two companies mine about a third of their combined 12m gold ounces, some of their operations are separated by little more than a fence and security guards. The companies’ combined operating and capital spending budget will be $65bn over the next half-decade, JPMorgan thinks: two-thirds of an Apollo moon programme. A small cut to that could result in a big boost to the combined companies’ value, if the synergies can be achieved, and gold prices do not tank further.

There are projects further afield – where gold miners are increasingly unwilling to go, given capital required and the political risks. Newmont and Barrick could spin out a fifth of production, including projects in Asia and Australia, along with some debt, to investors who want higher risk and returns. But in any rump Americas-focused company it will still be critical to achieve the projected synergies.

Email the Lex team in confidence at lex@ft.com

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