Newmont Goes for the Gold(corp)

Newmont Mining NEM has announced the acquisition of fellow senior producer Goldcorp GG, which would form the largest single gold miner in the world. Combined 2017 production would have totaled 7.9 million ounces, excluding any divestments. Under the announced terms of the deal, Goldcorp shareholders will receive 0.3280 Newmont share and $0.02 in cash for each Goldcorp share they own, which represents a 17% premium on each company’s 20-day volume-weighted average price before the announcement.

Strategically, the deal makes some sense. The pro forma company will maintain an Americas-focused footprint, which helps maintain arguably lower geopolitical risk. In addition, Newmont has shown some recent operational successes with acquired assets, so it may be able to add better performance to the struggling Goldcorp.

We view the deal as favorable for Newmont shareholders and unfavorable for Goldcorp shareholders. As such, we’re increasing our Newmont fair value estimate to $36 per share from $34. We’re decreasing our Goldcorp fair value estimates to $11 and CAD 14.50 per share from $16 and CAD 21. Because we believe the transaction will be consummated as announced, we now base our Goldcorp fair value estimates on the announced exchange rate and our Newmont fair value estimate. We maintain our no-moat ratings for both companies.

Goldcorp has struggled in recent years with operational challenges, leading to share price underperformance relative to its gold mining peers. Nevertheless, we still see the offer price as far below our stand-alone fair value estimate of $16 per share as well as the consensus median target price of $13 per share. As a result, we think Newmont shareholders are getting a good deal at the expense of Goldcorp shareholders.

Estimated deal synergies of $100 million represent just 2% of the combined company’s cost of goods sold and selling, general, and administrative expenses. We view the modest target as both appropriate and achievable, as most synergies will occur through corporate overhead reduction.

This deal follow’s Barrick’s GOLD acquisition of Randgold last year, which we view as more attractive. Barrick completed its acquisition with a no-premium structure, addition of world-class assets, and the addition of a CEO with a strong operational record. Although Newmont’s acquisition of Goldcorp isn’t as attractive to us, the good acquisition price is hard to argue with and gives Newmont the opportunity to create value out of the deal.

Development Projects Help Improve Newmont's Cost Profile Nevada is an important piece of Newmont's portfolio, with nearly 20 mines operating in close proximity. This allows the mines to share facilities that employ a variety of processing methods to maximize recovery. In addition, brownfield investments can leverage nearby operations, lowering potential capital costs. Newmont's other mines are in Mexico, Ghana, Australia, and Suriname.

Newmont faces declining production and rising costs at Yanacocha (Peru) and Ahafo (Ghana). However, new mines Merian and Long Canyon, development projects at Ahafo, and the acquisition of Cripple Creek & Victor should help offset the decline.

The cheap purchase price for Goldcorp gives Newmont significant leeway to create value out of the deal, as Goldcorp has struggled with the operations at its mines. The deal stands in stark contrast to the merger history of the sector, in which large premiums consistently destroyed shareholder value.

Our long-term nominal gold price forecast is $1,300 per ounce in 2020. Investment demand will weaken further as the Federal Reserve raises interest rates, weighing on near-term gold prices. However, Chinese and Indian jewelry demand should eventually fill the gap left by investment demand. Strong preferences for gold in these countries drive high income elasticity, and rising incomes should result in robust jewelry demand growth over the next few years. Strong demand will lead to a production shortfall, requiring a higher incentive price to encourage additional mine production. However, cost deflation caps the potential upside from an otherwise strong demand story. Depreciation in producer currencies, lower oil prices, and general mine cost deflation stemming from the end of the Chinese-driven commodity boom have helped drive cost reductions, lowering the marginal cost of production.