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 the letter
to Barrick's directors that said a "constructive, mutually
respectful" relationship didn't exist between the two
companies.
In a follow-up release, Toronto-based Barrick said Newmont tried
to renegotiate three "foundational" elements of a deal that both
had signed on April 8.
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 Mr. Thornton had twice told
Newmont last Thursday that the talks were "dead." Mr. Calarco
appeared to also criticize Barrick Chairman Peter Munk for saying
in a newspaper interview that Newmont was "extremely bureaucratic
and not shareholder friendly."
Barrick shot back later Monday, saying that after signing a term
sheet, Newmont had tried to renegotiate the location of the merged
company's head office; the identification of any specific assets
that would be included in a spinoff company; and governance
arrangements, such as the roles and authority of the company's new
chairman, the lead director and the chief executive officer.
Among the governance disagreements was whether Mr. Thornton
would be executive chairman or just chairman, according to a person
familiar with the matter.
A spokesman for Newmont said the firm didn't renege on what was
a "draft summary" of a deal.
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
J.P. 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 decline in
grades in the gold sector have been greater than in most other
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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