5 Jul

Why BMO Turned Bullish on Barrick but Is Neutral on Newmont

WRITTEN BY Anuradha Garg

BMO bullish on gold and neutral on NEM

BMO Capital Markets resumed coverage on gold stocks on Wednesday. BMO analyst Andrew Kaip is bullish on Barrick Gold (GOLD) and upgraded it from “market perform” to “outperform” and raised its target price from $14.5 to $20.0. On Newmont Goldcorp (NEM), however, he has a neutral stance, and he downgraded NEM from “outperform” to “neutral” and lowered the stock’s target price from $45 to $42.

Why BMO Turned Bullish on Barrick but Is Neutral on Newmont

GOLD and NEM’s recent mergers

Both Barrick Gold and Newmont Goldcorp have embarked on merger and acquisition sprees lately to grow their reserves as organic growth has been difficult to come by. Barrick Gold (GOLD) and Randgold Resources’ merger announcement in September set the stage for much-needed consolidation in the gold sector. Gold companies have been under tremendous pressure over the last few years. Gold miners haven’t kept up with broader equities (SPY) or gold, having lost favor with institutional investors after making M&A decisions at the peak of the commodity cycle, which resulted in high debt.

On January 14, NEM and Goldcorp entered an agreement in which Newmont agreed to acquire all of Goldcorp’s outstanding shares in a $10 billion stock-for-stock transaction. This merger created the biggest gold miner, which combined Newmont’s 68.5 million ounces and Goldcorp’s 52.8 million ounces, forming the world’s largest asset base.

Barrick’s hostile bid for Newmont

However, NEM and GG’s merger did not go down very smoothly. In February, Barrick made an unsolicited bid for its rival Newmont in an all-share deal. Barrick mentioned that this all-share transaction was far superior to Newmont’s proposed deal with Goldcorp. Barrick, however, didn’t offer any premium to Newmont’s value. Barrick CEO Mark Bristow said this proposed merger could unlock more than $7 billion in the net present value of real synergies. In March, Newmont rejected Barrick’s hostile bid mentioning that Barrick’s unsolicited negative premium proposal is not in shareholders’ best interest. NEM mentioned that the combination with Goldcorp is significantly more accretive to Newmont’s shareholders on all relevant metrics compared to Barrick’s proposal.

Barrick and Newmont’s Nevada joint venture

After this, Barrick ended the hostile bid for NEM given the creation of a 61.5%–38.5% joint venture with their combined Nevada operations. By combining operations with Newmont, Barrick will be able to use its infrastructure, which should improve the profitability of the operation.

BMO’s Andrew Kaip is also positive on the value accretion to Barrick from the joint venture with NEM in Nevada. He expects this operation to unlock up to $2.8 billion in combined synergies. As reported by Barron’s, Kaip said, “We see…investors benefiting from the net result of making the two companies stronger and more profitable champions of the gold sector.”

BMO is positive for Barrick versus Newmont

So, while Andrew Kaip is recommending investors consider Barrick due to the synergies and value-unlocking potential of the Nevada operations, he doesn’t see Newmont Goldcorp as a “buy” based on these synergy benefits because he sees recent issues with Newmont as having tempered investor interest. Recently, a fire at the company’s Musselwhite mine forced it to halt its operations. Moreover, investors are still concerned about Newmont’s Goldcorp merger. Kaip believes that a rating revision for NEM could be made when the Goldcorp acquisition and Nevada joint venture start showing benefits, which he believes won’t likely happen until late 2019 or early 2020.

Analysts’ ratings on NEM and GOLD

Out of the 16 analysts covering NEM stock, 69% have “buy” ratings on the stock. Newmont has been focusing on reducing debt, which has been instrumental in turning analysts’ sentiment around. It had only 56% “buy” ratings one year ago. In the future, analysts and investors are looking forward to the company’s merger execution with Goldcorp.

In contrast to Newmont, Barrick’s stock has “buy” ratings from only 16.0% of analysts covering the stock. Analysts turned negative on Barrick Gold stock following its protracted issues in Tanzania and Argentina. While analysts are happy with Barrick Gold’s merger with Randgold Resources, they’re likely waiting for the execution of the company’s merger and the related synergy benefits to turn more positive on the stock.

We‘ve discussed the likely upside from both Newmont and Barrick stock in Which Gold Equities Could Have Upside Potential as Gold Shines.

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