Newmont-Goldcorp Merger May Boost Institutional Interest In Shares
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(Kitco News) - Analysts say Newmont Mining Corp.’s (NYSE: NEM) planned acquisition of Goldcorp Inc. (TSX: G, NYSE: GG) could spur additional interest in the new company’s shares from institutional investors since it will become the largest gold producer in the world.
This will make Newmont Goldcorp – the name of the merged company, assuming it gets all of the necessary approvals – the “go-to” firm for investors who want exposure to the gold market through a mining stock. Still, one observer expressed mixed feelings about the freshly announced deal since it limits the choices of mining stocks for investors in general.
David Morgan, publisher of the Morgan Report, issued an alert in which he said he wasn’t “particularly favorable” to the deal but said the merger does create a leading primary producer with a deep pipeline of organic growth opportunities.
“This should become the go-to gold investment vehicle over Barrick Gold as it has better geographic diversity with 35%-40%…of production sourced from North America,” Morgan said.
The bulk of Newmont Goldcorp’s mines will be in countries considered to be mining-friendly jurisdictions, which makes this company less risky politically than the Barrick-Randgold merger, Morgan told Kitco News in an interview.
Acadia Mining – which is majority owned by Barrick – has been in a long-running tax dispute with Tanzania. After its merger with Randgold Resources Ltd., one of Barrick’s major mines is also in the Democratic Republic of the Congo, where companies have had run-ins with the government in recent years.
Newmont Goldcorp’s overall production should increase in the future given Goldcorp’s numerous Canadian projects, Morgan said.
“This will likely be preferred over Barrick’s production profile, which has exposure to some countries with higher country-risk profiles, such as the DRC,” Morgan said. “But this is just the starting point as both companies are likely to reposition and upgrade their respective portfolios over the next several years.”
Morgan is not a major fan of the increased number of mergers in general, but he did not have any specific criticism of the Goldcorp-Newmont deal.
“I don’t like the philosophy, meaning that like the banking sector, it [the gold sector] gets more and more consolidated into bigger and bigger and bigger companies,” Morgan said. “That gives investors less choice and … there is less incentive to be competitive or on the leading edge.”
Meanwhile, Credit Suisse updated an early-morning first reaction to the merger on Monday afternoon. Analysts noted that a conference call by company officials was “light on details” regarding an estimated $100 million in annual pre-tax synergies and an expected $1 billion to $1.5 billion in divestments.
Still, Credit Suisse said that the deal “makes sense to us” from the perspective of Newmont.
“Generalist capital in the gold space tends to flow to companies with large-scale, geographic diversification and an attractive dividend,” Credit Suisse said. “The merger between Newmont and Goldcorp provides Newmont with scale as the largest gold company in the world measured by market cap, production, or reserves. We believe much of the motivation to do the deal was driven by Newmont’s desire to remain as the largest gold company, a title it lost following the Barrick deal, and to remain the go-to name in gold.”
The status as the world’s biggest gold miner likely would mean increased interest by institutional investors, Credit Suisse said in its original note.
“NEM [Newmont] is also acquiring GG [Goldcorp] shares at decade lows and should be able to improve operations at GG’s mines given its strong/consistent track record,” Credit Suisse stated.
The main issue could be shareholder approval by Goldcorp stockholders, Credit Suisse added, although noting that the merger is likely to get the necessary votes.
“It will come down to whether GG [Goldcorp] shareholders look at the ABX [Barrick] no-premium deal [with Randgold] as the benchmark, in which case they will view the Newmont deal as attractive, or whether they look at historical GG share price and view the deal as selling at the bottom,” Credit Suisse said.