By Alistair MacDonald
Talks between Barrick Gold Corp. and Newmont Mining Corp. have
ended, marking another failure in the long history of merger talks
between the world's two largest gold miners and leaving them both
still facing the sector problems that the combination had hoped to
partly alleviate.
The latest round of talks ended acrimoniously, with Newmont
taking a swipe at Barrick Co-Chairman John Thornton in letter to
Barrick's directors that said a "constructive, mutually respectful"
relationship did not exist between the two companies.
Toronto-based Barrick on Monday said it was Newmont's decision
to terminate the talks.
"Although Barrick believes the interests of shareholders are
best served through the completion of this business combination,
Newmont's board has determined that the interests of Newmont's
shareholders are best served by remaining independent," Barrick
said in a brief statement.
The Wall Street Journal reported that the two sides were close
to a deal earlier this month , but talks stumbled over plans for a
spinoff of some assets.
Recent informal contact had failed to bring the two sides to a
deal that would have seen Barrick take over its U.S.-based rival by
offering its shareholders a premium of 13% over Newmont's share
price, according to people familiar with the matter.
The two sides have talked on and off for two decades and could
do so again.
In the letter to Barrick's board, dated April 25, Newmont
Chairman Vincent A. Calarco said Barrick had twice told Newmont
last Thursday that the talks were "dead." Mr. Calarco appeared to
also criticize Barrick Chairman Peter Munk for saying in an
newspaper interview that Newmont was "extremely bureaucratic and
not shareholder friendly."
The miners had hoped a combination would lead to about $1
billion in cost savings, particularly in Nevada, where the two
operate almost side by side in a state that accounts for about 40%
of each company's production. While most analysts thought the cost
savings would be around $500 million, they had, in general,
welcomed the talks.
"Both companies are optimized for the 2000s bull market and this
deal would, in our opinion, have been a good first step toward
restructuring for the current market," John Bridges, an analyst at
JP Morgan, said in a research note.
Since late 2011, gold miners have been hit hard by a weaker gold
price coupled with continued high costs. That followed a decadelong
boom that saw aggressive empire building, which miners are still
paying for in write-downs. Large gold miners face another problem:
increasing gold production in a world where new high-grade deposits
of the yellow metal are being found with less regularity. Given
such difficult times, some investors saw the merger talks as a sign
of desperation from two struggling giants.
"It's the equivalent of two drunks holding each other up so they
both don't fall down on their own," said Paul Sassi, a fund manager
at CJG Asset Management in New York and former Barrick
investor.
At the heart of the sector's troubles: gold futures have fallen
30% since they peaked in August 2011. While gold is up
year-to-date, most gold watchers expect the metal to end the year
flat to lower, as Chinese demand falters and as the U.S. Federal
Reserve winds down its efforts to stimulate the economy. That
stimulus had supported gold, which is used by investors as a hedge
against the inflation that such efforts can spark.
Underscoring how investors have fled the sector, shares in both
companies have lost even more value, falling by around 64% in the
same time period.
The gold rout has exposed how strained many gold miners' balance
sheets have become, with some of the highest debt levels in the
mining sector and billions of dollars' worth of equity write-downs.
Last year, gold miners wrote down $36 billion of value, according
to BMO Capital Markets. Almost a third of that came from
Barrick.
The Toronto-based company has written off more than $6 billion
on one project alone, the Pascua-Lama project that straddles the
border between Argentina and Chile. Its problems with the giant
mine aren't over, given its construction is on hold.
Newmont, too, has troubled projects. In Indonesia, the miner
faces a ban on the export of its copper concentrate, the crushed
ore that is usually smelted into sheets of pure copper, as the
government there looks to force miners to do the refining within
the country.
Projects like Pascua-Lama were conceived when the price of gold
was high enough to make expensive mines in isolated corners of
developed markets worth the risk.
The quality of gold being found in easy-to-access places has
been falling. The average grade of gold finds has gone down from
2.6 grams of gold per ton in 2001 to 1.69 grams per ton last year,
according to data from by Raw Materials Group. The falling grades
of find in gold have outperformed almost all other major
metals.
The failure of the talks deprives Mr. Munk of a final deal
before he retires from the company he created three decades ago.
One of Canada's best known businessmen, Mr. Munk said Barrick has
made at least three other attempts to merge with Newmont since the
early 1990s.
"For 30 years...Barrick has been my dream, my passion," he said
in an interview last week. "I don't think of much else. This is my
life."
Write to Alistair MacDonald at alistair.macdonald@wsj.com
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