Newmont Mining has lobbed a US$10 billion tilt for Canada’s Goldcorp, which will create the world’s largest gold miner.
Under the definitive agreement, Newmont will acquire each Goldcorp share for 0.328 of a Newmont share, representing a 17% premium on the companies’ 20-day volume weighted average share price.
The all-share takeover gives Goldcorp an equity value of US$10 billion, with a premium and enterprise value of US$12.5 billion.
The combined entity will create a gold mining behemoth, with the potential to produce 6-7 million ounces of the precious metal annually over a decade.
Newmont expects the merger to be immediately accretive to its net asset value and cash flow per share. In addition, up to US$100 million in annual pre-tax synergies is expected to be generated.
As well as providing shareholders with the largest gold reserves per share, the new company, called Newmont Goldcorp, will offer the highest annual dividend among senior gold producers.
The new company will be led by Newmont chief executive officer Gary Goldberg until he retires at the end of 2019. Newmont chief operating officer Tom Palmer will then take his position.
Commenting on the transaction, which is expected to close in the second quarter pending shareholder and regulatory approval, Mr Goldberg said it would create the world’s leading gold business with enormous value-creation opportunities.
“This combination represents the most promising path to deliver superior and sustainable value for our shareholders, employees, host countries and communities,” he said.
If successful, the merged entity will boast the largest reserves and resources base in the gold sector. In 2017, rival Barrick Gold just edged out Newmont to be the largest gold miner, producing 165.6 tonnes of gold for the year, compared to Newmont’s 163.8t.
Newmont Goldcorp will also prioritise project development by returns and risk, while targeting US$1-$1.5 billion in divestitures over the next two years.
Gold consolidation heats up with Barrick and Randgold
The tie-up plans between Newmont Mining and Goldcorp follows on from the recent high profile US$5.4 billion merger of Barrick Gold and Africa-focused producer Randgold Resources last year.
Touted as “the new Barrick”, the merged entity will be focused on creating profitable growth.
“Our overriding measure of success will be the returns we generate and not the number of ounces we produce, balancing boldness and prudence to deliver consistent and growing returns to our fellow owners, a truly simple but radical and achievable concept,” Barrick executive chairman John Thornton said in September.
Trading of the merged entity’s shares on the New York Stock Exchange officially kicked off at the beginning of the year, giving Barrick a market capitalisation of about US$23.75 billion.
Cost pressures weigh on miners
The increase in merger and acquisition activity among the big gold companies comes as miners look for ways to boost cost efficiencies to offset higher extraction costs.
Increased cost pressures, a stronger US dollar and lacklustre bullion prices have added to companies’ woes and have left many gold investors dissatisfied.
Randgold chief executive officer Mark Bristow noted last year that the gold industry had been criticised for its “short-term focus, undisciplined growth and poor returns on invested capital.”
The tide, however, looks to be turning in gold’s favour this year, as investors flock to the safe-haven metal in an attempt to hedge against risk.
A backdrop of economic and geopolitical instability is likely to support gold prices in 2019 and 2020, which could underpin further gold consolidation on the asset front.
The US gold price is currently sitting at US$1,292 an ounce and looking to test the US$1,300/oz resistance level, while the Australian dollar gold price reached a high of $1,870/oz today and looks set to test the $1,900/oz barrier.