What Barrick Bid Tells Us

The world’s biggest gold miner, Barrick Gold is making a hostile bid for the US’s biggest gold miner, Newmont to create a $42 billion mega miner.  So what might this tell us?

We have written previously of the falling mining yields, fewer major discoveries (there hasn’t been a major discovery in 15 years) and longer timeframes from discovery to production as regulations continually get harder.  Gold is getting harder to find, harder to get out and harder to get started.  So if you are big and have shareholder expectations of ever increasing price earnings, you’re forced to look at mergers and acquisitions (M&A).

You also know that the US Fed has capitulated to the sharemarket and Trump and abandoned its tightening policy.  At just 2.25%, US rates are very much unlikely to increase from here and already analysts are talking about WHEN they will fall again.  As is the intention of such a move, it encourages firms like Barrick to borrow and expand with ever increasing debt.  

One doesn’t acquire a US$18 billion company without debt, and lots of it.  And remember this is a hostile bid so that number could increase.  Coincidentally Newmont is making a US$10 billion merger play at North American giant, GoldCorp and even told Bloomberg they aren’t ruling out making a hostile bid for Barrick in return.  If Newmont acquired GoldCorp it would become bigger than the predator Barrick.

Despite the allure of cheap money and the scarcity of gold deposits, this sort of action doesn’t happen without these companies clearly being very bullish on the price of gold.

For Australia this will be interesting as Newmont has 3 large Australian mines worth between $5.6 and $7 billion that Barrick is saying it will offload if the deal goes ahead.  Newmont is already in a JV with Barrick in the ‘Super Pit’ at Kalgoorlie (the biggest open cut mine in the world as pictured below) and owns Boddington and Tanami in the NT.  These collectively yield 1.8m oz per year.  There is plenty of Australian interest in these 3 should they become available on Barrick prevailing.