By Al Root
March 22, 2019 1:08 p.m. ET
Newmont’s Goldcorp Deal Faces Opposition. Here’s What It Means for Gold Miners.
Photograph by Romeo Gacad/AFP/Getty Images
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Hedge fund and prominent gold investor Paulson & Co. is opposing Newmont Mining ’s proposed merger with Goldcorp .
“The $1.5 billion premium to Goldcorp (ticker: GG) shareholders is unjustified given Goldcorp’s poor performance,” wrote John Paulson and Marcelo Kim in a letter sent to Newmont (NEM) CEO Gary Goldberg.
https://www.barrons.com/articles/newmonts-goldcorp-deal-faces-opposition-heres-what-it-means-for-gold-miners-51553274512?mod=hp_LATEST
The suggestion that Goldcorp has struggled isn’t controversial. Its shares have returned negative 15% a year on average for the past five years. While combining a top operator with an underperforming asset can generate shareholder value, which may be true for Newmont-Goldcorp, the deal has implications for other gold miners as well.
The back story: Goldcorp stock has struggled—and more than other gold miners. The VanEck Vectors Gold Miners ETF (GDX) has returned negative 1.7% a year on average over the last five years. Still an annual loss, but better than Goldcorp stock’s performance. Newmont shares, by contrast, have fared much better returning 7.7% a year on average over the same span.
The wide spread in stock performance may be driving M&A activity. 2019 started off with a bang in the sector when Newmont announced its $13 billion bid for Goldcorp. About a month later Barrick Gold (GOLD) announced a hostile bid for Newmont saying a combination between Barrick and Newmont was superior to the company Newmont wants to form with Goldcorp.
Newmont and Barrick eventually agreed to a joint venture—combining assets in Nevada to capture synergies that benefit both companies. The end of Barrick’s hostile bid left the Goldcorp deal active.
What’s new: Paulson & Co wants the terms of the Newmont-Goldcorp deal re-cut and wants Newmont to offer 0.254 shares of Newmont stock for each share of Goldcorp (plus 2 cents of cash per Goldcorp share). The new ratio values Goldcorp at $8.73 per share, below the $9.69 Goldcorp was trading at before the Newmont deal was announced.
Goldcorp shares were at $10.64 in Friday afternoon trading—more than 20% above Paulson’s suggested price. Based on that reaction, the market doesn’t think a large adjustment to the exchange ratio is likely yet.
Paulson & Co. referred Barron’s to its letter when asked about the deal, and Newmont didn’t immediately respond to questions about the price it’s paying for Goldcorp.
Looking ahead: It seems that most everyone involved agrees with the premise of the Newmont-Goldcorp transaction—that Goldcorp could benefit from Newmont’s operational acumen. Barron’slikes the Newmont-Goldcorp deal as well, in part, for the same reason. Paulson’s suggested exchange ratio may be its opening gambit with Newmont in an effort to recapture some of the deal value, but it would be surprising to see the entire deal derailed.
And Newmont’s approach could have implications for other gold miners. Companies like Kinross Gold (KGC) and Eldorado Gold (EGO) have lower returns than peers of similar size. Perhaps larger miners with better operational histories could adopt the Newmont approach in an attempt to create value through better operational execution.
Write to Al Root at allen.root@barrons.com
https://www.barrons.com/articles/newmonts-goldcorp-deal-faces-opposition-heres-what-it-means-for-gold-miners-51553274512?mod=hp_LATEST
God Bless
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