Movers and SHAKERS
How Will the Current M&A Frenzy in the Mining Industry Impact Investors?
(Note: related companies are at base of the story and all the sources listed in the "Balanced" section)On February 25, Barrick Gold announced a hostile $17.8 billion bid for Newmont Mining. This follows Barrick’s purchase of Randgold Resources which closed in January. Newmont is in the process of acquiring Goldcorp Inc. and Barrick’s offer is contingent on Newmont abandoning its plans to acquire Goldcorp. These transactions follow several other recent transactions in the mining space. Will there be more consolidation and what are the implications for precious metals investors?
Transactions highlight value in the mining sector. With the outlook improving for precious metals prices, it appears stronger players recognize value and have seized the moment to acquire new assets to better position themselves for a recovery. In some cases, it’s desire for scale, in others it’s a move to increase exposure to gold, in others it’s a case where the combined entity may offer an enhanced growth profile and stronger competitive position than either company on a stand-alone basis. Each transaction has been unique.
Asset divestitures could create opportunities for strategic buyers. Following significant mergers, management teams often rationalize portfolios by selling assets that are no longer considered core to their business. Proceeds from asset sales are often used reduce leverage, strengthen balance sheets and reinvest in core businesses. Asset divestitures create opportunities for other industry players to acquire assets that complement their portfolios and enhance their growth profile.
M&A activity could also usher in more joint venture activity. Joint ventures can be an appealing option for companies with varying levels of core competencies and/or balance sheet strength with each making unique contributions to the success of a project. Additionally, joint ventures are a way to mitigate risks and share financing responsibilities. As M&A activity increases, more companies may identify and/or decide that joint venture arrangements on certain projects may be preferable to an outright combination.
Risk of overpayment. While the increasing frequency of transactions may indicate value, it may also increase the risk that some managements will overpay for assets in their quest to keep up with the Joneses. As industries consolidate, industry leaders can gain relevance with investors, while laggards risk getting stuck in the middle without a clear competitive advantage. Barrick’s management underscores this point in seeking to “create the industry’s best gold investment vehicle and a business of sufficient merit that would attract generalist and yield-oriented investors as well.”
Unfulfilled expectations. In hindsight, mergers can often be disappointing. Corporate cultures clash, revenue and cost synergies may not materialize or, in a worst case, shareholders experience value destruction. Shareholders should carefully evaluate transactions before casting their vote of approval. In the case of Barrick/Newmont, the stakes are high because the Barrick offer could serve to spoil Newmont’s plans to acquire Goldcorp which could be good or bad, depending on one’s perspective.Aligning executive compensation with shareholder returns. Given that mining is an extractive industry, components of executive compensation are generally linked to expanding mineral resources and reserves. Boards of directors need to be diligent about linking executive awards to successful outcomes. Vesting portions of payouts contingent on positive economic assessments or other measures could help along with the ability to claw back compensation if acquisitions underperform initial expectations.
80's throwback. In the 1980s, a period when corporate raiders and hostile take-overs may have reached a crescendo. T. Boone Pickens famously posited that it was cheaper for acquirers to pick up oil reserves through mergers than through exploration. Whether or not this statement is analogous to the present mining industry, more consolidation is likely to occur with potential positive implications for the sector and its investors. It is unclear if Barrick’s hostile offer for Newmont will win the day, but the headlines are sure to pique investor interest in a sector that was largely overlooked in 2018.
Barrick Gold Makes Hostile $17.8 Billion Bid for Newmont Mining, Danielle Bochove and Ed Hammond, Bloomberg, February 25, 2019.
Barrick-Randgold Merger Consummated as Trading Starts in New Company’s Shares, Barrick Press Release, January 2, 2019.
Letter to Newmont’s Board of Directors, John Thornton, Executive Chairman and Mark Bristow, President and Chief Executive Officer, Barrick Gold, February 25, 2019.
Barrick-Newmont Merger Would Leave Up To $7B of Assets Up for Grabs, Cecelia Jamasmie, Mining.com, February 26, 2019.Replaying the Slaying of Gulf, David A. Vise, Washington Post, November 11, 1984