Gold miners bury a good deal under two shiny ones

There is value to be had from merging the neighbouring mines of Barrick Gold and Newmont Mining in the US state of Nevada. But that potentially good deal is being buried under two shinier ones. Newmont’s rejection on Monday of Barrick’s $18 billion merger proposal, in favour of its own deal to buy Goldcorp, further gets in the way of an outcome that would benefit both sides. The merger envisaged by Barrick chief Mark Bristow would create the world’s biggest gold miner, with his company on top, and create pre-tax value he weighs at $7.1 billion.

Tax that at 45 per cent and parcel it out in a 56-to-44 ratio, and it suggests a 9 per cent uplift to both companies’ undisturbed market capitalisations, according to Breakingviews calculations. The downsides are that the two don’t get along, Barrick isn’t paying a premium in any traditional sense, and it only just bought another big miner, Randgold.

Newmont says its bird in the hand — a $10 billion agreed acquisition of Canada’s Goldcorp — is better. That’s not obviously the case mathematically. It would end up with a 65 per cent stake in a company that Newmont reckons would be worth $4.4 billion more, pre-tax, and that’s after aggressively jacking up its estimate of synergies.

Deduct tax at 35 per cent, and Newmont shareholders would in theory end up only around 5 per cent better off.

Simply doing a joint venture in Nevada might yield $5 billion of extra pre-tax value in total, a Barrick figure also referred to by Newmont. That’s the bulk of Bristow’s touted benefits, and more than Newmont’s deal with Goldcorp offers.

But it would involve the partners overcoming their differences and agreeing who runs what. The odds of that aren’t great. For starters, Newmont reckons Barrick should get just over half the JV, whereas Barrick thinks it ought to have more like two-thirds.

If Bristow decides to stick to his guns, he probably needs to offer a sweetener. He could, say, give 46 per cent of the new company to Newmont rather than 44 per cent — worth roughly an additional $1 billion.

At least then Newmont couldn’t say there’s no premium, and it would cover the $650 million break fee that could be due to Goldcorp. That might get Bristow what he wants — but with less upside, and a double integration challenge.