Why a Barrick-Newmont merger would make sense



Merger deal talks

Barrick Gold Corporation (ABX) and Newmont Mining Corporation (NEM) have been contemplating a merger for a long time—three times in the last seven years. This year in April, deal talks once again ended acrimoniously with both parties accusing the other of thwarting the deal. Among the major points of disagreement cited for the breakdown—where to locate the head office and what assets to spin off.

Still, while the deal fell apart again this time, it might not be over yet.

Barrick and Newmont

In August 2014, Newmont’s CEO said that he was open to resuming potential merger discussions. Earlier in July, Barrick’s Chairman John Thornton said that although open to a tie-up with Newmont, a merger was not his current focus.

Why it makes sense

In the current environment where gold prices are falling, companies’ share prices are under pressure. To rationalize costs and increase revenues, it makes sense for companies with significant scale and overlapping operations to merge.

To learn more about why prices are falling, read Market Realist’s series, Must-know: Why gold’s price could decrease even more.

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Both Barrick and Newmont have large, overlapping operations in Nevada. Combining operations would reduce costs and increase free cash flow, which both companies need to do. So there are synergies to be had. In fact, according to some estimates, a merger could result in $1 billion in cost savings. If combined, the two companies would produce ~12% of annual mine output—three times the output of the next-largest producer, Goldcorp Inc. (GG).

The VanEck Vectors Gold Miners ETF (GDX) invests in all the above-mentioned stocks while the SPDR Gold Trust ETF (GLD) provides exposure to the spot gold prices.


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