Two mining giants embark on a joint venture.
There’s a lesson in the recent courtship between Newmont Mining and Barrick Gold: If you can’t beat them, join them—or, in business parlance, if you can’t get what you want via a hostile takeover, settle for a joint venture.
Among the world’s largest mining companies, Greenwood Village, Colorado–based Newmont and Toronto-based Barrick both have Nevada operations, a fact that helps explain the events of February and March. “Barrick’s fortune was built on its gold strike in Nevada, which turned out to be one of the world’s biggest gold mines, and Newmont had assets in that same area,” notes longtime financial analyst Gavin Graham. “It would have made sense even 20 years ago to put the two together, but it always [came down to] who was going to have the bigger percentage.”
Barrick withdrew its hostile takeover bid for Newmont on March 11, when the companies agreed on a joint venture covering most of their Nevada operations. The agreement telegraphed some realities about gold mining, says Chris Mancini, mining and metals analyst at Gabelli Gold Fund.
“It says that at this point, companies are very willing to do what they need to do to realize synergies,” he says, adding that falling prices have made gold companies more willing to deal. Newmont, which has a 38.5% share of the new joint venture, was willing to give up control of its Nevada assets in order to partner up.
Both companies anticipate huge savings and stand to benefit in different ways. Barrick, with a 61.5% share, will have operational control of the world’s largest gold-mining area, Graham notes. For its part, Newmont escaped a hostile takeover; and the agreement removes one potential hurdle for its deal to merge with Vancouver-based Goldcorp, which has run into opposition from Newmont shareholders.
Had Newmont backed out of that deal, it would have triggered a $650 million breakup fee. And Newmont’s share of the joint venture is higher than was offered in previous negotiations. Going the joint-venture route also means Newmont can participate in Nevada revenues without exposure to Barrick’s troubled mines in Tanzania and the Democratic Republic of the Congo.
The joint venture opens up further possibilities, as well, Mancini suggests—such as someday converting into a stand-alone company.