After months of back and forth, we learned that the merger had been called off as those involved were unable to agree to terms, reportedly, primarily based upon the leadership structure of the proposed new organisation.
Towards the end of last year, both companies reported that they were still open to resuming merger discussions. And as the price of gold continues to fall a teaming up looks not just to be more likely, but perhaps necessary to offer some reprieve in what have been two of the poorest performing large caps of the last five years.
So, with this said, what would a merger mean for the two companies, how might it affect their operations going forward, and what implications would a further decline in the price of gold have on the likelihood of such a merger taking place?
First, let’s take a quick look what we’ve seen from both of the companies involved and the price of gold over the past few years.
Back in November 2010, Barrick hits all-time highs of $55.74 (K150.65). At last close, the company traded at just $11.47 (K31), an 80 per cent decline over a five-year period.
A year after Barrick hit highs, Newmont did the same, reaching a Nov 1 price of $68.88 (K186.16). Subsequent to these levels, the company has lost 65 per cent of its market capitalisation and now trades around $24 (K64.86), with 52-week lows at just above $17 (K45.95).
The decline in market capitalisation of both of these companies has unsurprisingly paralleled a corresponding decline in the price of gold.
In the summer of 2011, gold reached highs of over $1900 (K5135). It is now trading below $1200 (K3243). The takeaway here is that together with the sustained decline in the price of gold over the last five years has come an eroding of most shareholder value associated with both Barrick and Newmont.
It was this erosion that first led the two companies into merger talks, with the potential cost savings that would come about as a result of the merger translating to an improved bottom line and a revision of the companies’ market capitalisation.
If gold continues to fall, the necessity of cost savings increases, and along with that, the likelihood of a merger. So let’s assume we do see further decline, and the companies enter into the merger agreement.
What might the combined entity look like? Let’s look at it from a hypothetical perspective, but one that might appeal to both companies’ shareholders.
Perhaps the most appealing to both Barrick and Newmont is a situation in which the firms merge while simultaneously trimming operations to focus on the US and specifically Nevada.
John Thornton, executive chairman of Barrick, announced earlier this year a number of cost-cutting actions that included plans to sell two mines – Cowal, in Australia, and Porgera, in Papua New Guinea. At the end of last month, the company announced that it had closed the sale of the latter of these operations to Evolution Mining for a total of $550 million (K1.49 billion). – seekingalpha.com