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Fresh out of transformational multibillion dollar mergers, Barrick is reaping the rewards; Newmont's has yet to pay off
On Monday morning, Barrick Gold Corp.’s chief executive Mark Bristow visited the mining giant’s Toronto headquarters to announce second quarter earnings, and to take a victory lap on what’s shaping up to be a good summer.
“It’s a been a fun six months,” Bristow told the assembled analysts, bankers, journalists and others. “Today, I’m glad to share with you the enormous progress our teams have made.”
Barrick recently negotiated to purchase its troubled subsidiary in Tanzania, trimmed overhead and helped make other cost saving moves that helped propel its stock up 50 per cent since June.
“That’s a lot of boxes ticked,” he told the assembled crowd.
Having taken over in January after Barrick acquired his former company Randgold Resources Ltd., Bristow has managed to fix several lingering problems, including the empty CEO office. He’s also benefited from several fortuitous events including a run-up in the price of gold, all of which have helped make Barrick the world’s “most-valued” gold mining company with US$31.4 billion of market capitalization.
It contrasts with Newmont Goldcorp, its longtime rival, which had been “most valued” but it has been hit with a string of bad news, including a fire at one of its mines, a 50-day labour protest and other challenges. It’s smaller for the moment, if only by a narrow margin, at US$30.9 in market capitalization.
Newmont did not make anyone available for comment.
In the past year, both companies completed transformational multibillion dollar mergers — with Newmont acquiring Goldcorp in April and Barrick taking over RandGold in January — which catapulted them ahead of the rest of the industry in terms of their size and gold production.
Now, the two companies’ businesses are more intertwined than ever: They jointly operate the world’s largest mining complex in Nevada, which produced four million ounces in 2018 and mines in the Dominican Republic and Australia.
Over the years, there has been various talk of mergers between the two companies, most recently in March, when Bristow’s Barrick launched a hostile bid, which the company dropped when Newmont agreed to consolidate its assets in Nevada in a joint venture.
Although they signed a standstill agreement that prevents any takeover attempts for two years, in some ways the competition has only intensified — and Barrick has been able to show investors the fruits of its merger before Newmont has, although its early days still.
“When you’re looking at the gold space you’re talking about a relative trade between Newmont Goldcorp and Barrick,” Andrew Kaip, a BMO analyst who covers both companies told the Financial Post.
In July, when he resumed covering both companies, he placed a buy rating on Barrick and a neutral rating on Newmont.
Both companies have risks, Kaip said.
After all, Barrick operates in the Democratic Republic of Congo and other parts of the world with serious risk of political change could interrupt any of its mines any day. Newmont has 90 per cent of its production from the Americas and Australia, but will need time to deliver returns.
Ultimately, Kaip said his team decided Barrick is the better immediate investment because as gold prices rise, it has costs under control and can deliver immediate value.
Newmont acquired assets in the Goldcorp transaction that may pay off yet, but “it’s going to take Newmont a couple (of) quarters,” Kaip said.
Newmont is in the midst of a leadership transition with chief operating officer Tom Palmer moving into the chief executive and president role. He explained to analysts on an earnings call in late July, that Newmont needs to apply its “rigor” to some of Goldcorp’s mines.
“To be frank … there was not the work done on exploration, there wasn’t the work done on development, and that’s absolutely fundamental in either an open pit or underground mine,” Palmer told one analyst in July on an earnings call about Goldcorp’s former operations.
He pointed to Musselwhite, a former Goldcorp mine located 500 miles north of Thunder Bay, and beneath a lake as an example of how some of the mines were undercapitalized. It pumps out 260,000 ounces of gold per year but shut down in April after a fire destroyed a conveyor system.
Palmer said the impact of the fire was exacerbated because the mine only has one open stope — mining terminology for the space created by excavation.
“That’s unacceptable,” he said, adding Newmont will build six stopes and make other improvements to ensure smooth operation.
In May, the company ran into labour protests at a former Goldcorp mine in Mexico when truck drivers blockaded a road for 50 days, during which the operations went into maintenance mode.
Fixing the mines won’t be easy.
“As we talked about … there is 24 months, possibly up to 36 months for some of these operations to really get them to the level of performance that we would expect,” Palmer said.
Still, he said the company is already on track to achieve 40 per cent of the $365 million in annual cost synergies it predicted will result from its merger.
It also produced 1.6 million ounces of gold in the second quarter, on track to produce between six and seven million ounces in 2019. But Newmont reported its free cash flows declined by US$220 million from the previous quarter to negative US$79 million, and announced that investments in mine development and exploration is likely to increase in the next two years.
John Bridges, an analyst at J.P. Morgan, wrote that Newmont’s earnings have been hurt by the fact that it adheres to a less permissive accounting standard than most Canadian miners because it is listed in the U.S.
“We believe a portion of the weaker earnings reported in Q2 seemed to result from bookkeeping,” Bridges wrote.
As of Tuesday afternoon, its share price stood at US$37.12, roughly where it was in June when gold broke through US$1,400, even as other gold miners surged on analysts’ views that a bull market lies around the corner.
Indeed, gold has since continued upward to US$1,501 as of Tuesday, and reached an all-time high in many currencies, including the Canadian dollar.
Meanwhile, Barrick’s stock is up 16 per cent to US$18.11 since gold broke through US1,400 per ounce in late June as the company has rallied on a wave of positive news.
On Monday, it announced 1.35 million ounces of gold production, on track for as much as 5.6 million ounces of annual production — less than Newmont but it is predicting lower costs, and it posted free cash flow of US$55 million.
In July, it announced it had been awarded $5.83 billion in a long running arbitration with Pakistan over a mine that was never built.
Last month, Bristow negotiated to buy out minority shareholders in its subsidiary, Acacia Mining Plc, where current management has been locked in a crippling tax dispute with Tanzanian authorities since 2017. This week, Tanzania lifted a ban on the export of gold concentrates that had hurt the company, in a sign that Bristow may be able to improve operations there quickly. (A dispute about tailings facilities at one mine remains, however).
Bristow is also leading the consolidation of assets in Nevada, through a joint venture that will be 61.5 per cent owned by Barrick, and 38.5 per cent owned by Newmont. Bristow said the joint venture is halfway to achieving US$500 million in annual cost savings as a result of synergies.
“It’s quite a radical makeover,” Bristow told the Financial Post about Barrick under his tenure, “because we want to operate differently.”
He told the Financial Post that Barrick’s Toronto headquarters is down to just 60 people, having previously employed hundreds. Barrick also reinvented its management structure, hiring new general managers for each mine except one, almost entirely new finance managers, and creating a new role of mineral resource manager for all its mines, Bristow said.
Next quarter, the company plans to unveil a five-year plan that will update its reserve and resource estimates, and give a better sense of how long each mine can operate.
“We still have lots more to present,” he said. “I’m not a person who tries to impress on a quarterly basis. It’s a long-term focus.”
Copyright Postmedia Network Inc., 2019