Will The Proposed Nevada Joint Venture With Barrick Gold Help Newmont Realize Better Value For Its Shareholders?

by Trefis Team
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Newmont Goldcorp Corporation
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On March 4, 2019, Newmont Mining Corp. (NYSE: NEM), one of the largest gold mining companies, rejected the unsolicited, hostile takeover bid from Barrick Gold (NYSE: GOLD), and in turn proposed a joint-venture (JV) with Barrick for its Nevada operations. In February 2019, Barrick Gold had offered to buy out Newmont in an $18 billion deal, translating into a value of $33.50 per share for NEM, which was much lower compared to $36.48, the level at which NEM’s share had closed a day prior to the offer. As a condition, Newmont would have had to shelve its deal with Goldcorp, which is likely to complete in Q2 2019. As expected, Newmont’s management has declined the offer, as Barrick has offered no premium to NEM’s shareholders – in fact valuing them at a discount. Newmont would have also had to shell out a cancellation fee of $650 million to Goldcorp if it decided to call off their merger. Though the synergies from Barrick’s deal would outweigh the $650 million, the asset quality and diversification benefits, along with incremental cash flow per share and NAV accretion that the deal with Goldcorp offers, is much more. Additionally, the only benefit that the deal with Barrick would achieve is the synergy at Nevada, as Barrick wants to mainly take advantage of Newmont’s superior processing techniques and infrastructure at Nevada, but a merger would expose NEM to Barrick’s risky African assets, following its acquisition of Randgold Resources in January 2019, and thus reduce the overall returns to NEM’s shareholders. Thus, Newmont has proposed a joint venture with Barrick Gold for their Nevada operations. We believe that such a joint venture, if it materializes, would lead to higher earnings for the investors as well as would increase the potential upside to NEM’s share price, as the company would be able to reap benefits from the Goldcorp deal as well as synergies at Nevada.

We have summarized our key expectations about the effect the proposed joint venture would have on Newmont’s profitability and share price, in our interactive dashboard – What Effect Would A Joint Venture With Barrick Gold In Nevada Have On Newmont Mining’s Valuation? In addition, here is more Materials data.

[Source: Newmont-Goldcorp Transaction Presentation dated March 4, 2019]

 

Key Effects of the JV

Strong Revenue Growth: We believe that total revenue for Newmont would increase sharply by about 35% to $9.8 billion in 2019, from $7.3 billion in 2018, mainly driven by an increase of 36% in gold revenues. Gold shipments would likely increase to ~7.4 million ounces in 2019 from 5.5 million ounces in 2018, which marks a growth of 34.2%, driven by incremental volume from Goldcorp in Canada, Mexico, and Ghana as well as higher shipments in Nevada. The Nevada mines contribute a little over one-third of Newmont’s as well as Barrick’s total reserves and revenues. Thus, in case of the joint venture in which NEM is proposed to hold 45% interest, it would add to the total volume of gold attributable to Newmont. Gold prices have strengthened in the last three months and we expect prices to remain elevated during the year as institutional as well as retail investment in the yellow metal has been on an upswing with rising global economic uncertainty. Copper revenues would likely rise by 3.5% in 2019, driven by organic growth in volume as well as better price realization due to robust demand growth, especially with rising sales of electric vehicles.

Expected Synergies:  Barrick has significant mineral reserves and resources, while Newmont offers superior processing plant and infrastructure at Nevada. In case of a JV, which could certainly equal a Nevada gold mining powerhouse, the companies would be able to reduce cost per unit by taking advantage of Barrick’s tier-one gold assets and Newmont’s 13 processing facilities in the region. Cost applicable to sales (CAS) per ounce of gold is expected to decrease to $705 in 2019 from $708 in 2018 due to the expected synergies. This would be much lower than expected CAS of $711 per ounce in 2019 in the absence of a JV. Similarly, the all-in sustaining costs (AISC) per ounce of gold, which was $909 in 2018, is expected to be $925 in 2019 after a JV, much lower than $945 in a no-deal scenario. Though copper production is minimal at Nevada for both the companies, a JV would likely have a positive effect on the CAS and AISC per pound. Along with the expected synergy, increasing volume would also contribute to lower cost per unit.

Profitability: Net income margin increased significantly from -1.5% in 2017 to 4.7% in 2018, due to lower tax expense following the TCJ Act, with expectations of margins remaining almost flat in 2019. However, if both the companies go ahead with their joint venture, higher revenue growth along with synergy benefits would likely lead to margins increasing to about 5% in 2019. We expect margins to continue the upward trend going forward.

Stock Valuation

Presently, we have a price estimate of $39 for Newmont Mining’s share, which is higher than its current market price. NEM’s share price has maintained its upward trend over the last couple of years, whereas Barrick’s share has seen immense volatility, with it losing about 24% of its value in 2018. The offer made in February 2019 was the second takeover attempt by Barrick, with the last one made in 2014. Since then, NEM’s stock has returned 65% to its investors, as against Barrick’s return of -22%. Thus, we believe that Newmont’s decision of not going ahead with Barrick’s offer is in the best interest of its shareholders, as such a deal would have eroded the company’s value.

On the other hand, if the proposed joint venture goes ahead along with the Goldcorp deal, Newmont is expected to benefit immensely in the form of higher volume and revenue, better asset profile, decreasing costs, and improving profitability. In such a scenario, we have a price estimate of $44 for Newmont Mining’s share, which reflects a potential upside of about 28% from its current market price. This is more than double the potential upside of about 13% available to Barrick’s share price. As per the latest information, Barrick has invited Newmont for discussion regarding the Nevada joint venture. If the two gold giants are able to seal a deal at Nevada, it would benefit both, with Newmont taking away a major chunk and ensuring hefty returns to its investors.

 

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