Making Sense of the Mega Merger Mania

Barrick’s takeover bid for Newmont would create an unparalleled super-duper major. While the bid’s success is still unknown, it does bring attention to the potential gains of unitising operations in Nevada.

Gold rides momentum to new high

The gold price advanced in January following the US Federal Reserve’s dovish response to the December stock market volatility. This provided the momentum for gold to move to a new yearly high of US$1,346 per ounce on 20 February before pulling back to end the month at around US$1,313. However, gold has since dropped to about US$1,290. Following the yellow metal’s bright start to the year , it is too early to tell if the pullback is a consolidation within an uptrend, or a return to the range bound trading that has characterised the price pattern since 2013.

The strong central bank buying that characterised 2018 seems to continue. China purchased gold for the second consecutive month, buying about 12 tonnes in January. Azerbaijan nearly doubled its gold holdings to 100 tonnes. Meanwhile, Romania announced plans to move its 103 tonnes of gold reserves from London to local vaults.

Gold stocks slightly underperformed gold over the month. The NYSE Arca Gold Miners Index declined 1.6%, while the MVIS Global Junior Gold Miners Index fell 1.2%.

Stock market highs pose headwinds

The stock market has become a headwind for gold as the S&P® 500 is once again poised to make a run at new all-time highs. Complacency is creeping back, which weighs on safe haven investments. Every Fed chair since Alan Greenspan has been accused of protecting the stock market with monetary policies. Incumbent Jerome Powell was thought to be more hawkish and immune to the whims of the market when he took office. However, the Fed’s policy pause in response to stock market volatility in December has shown Powell to be as sensitive to the markets as his predecessors. David Rosenberg of Gluskin Sheff,  an independent Canadian wealth management firm,  believes the proliferation of exchange traded funds (ETFs), quantitative models, algorithmic trading, and momentum investing are all perpetuated by central bank suppression of risk premia, creating artificial market conditions where pricing is divorced from fundamentals. Ten years after the financial crisis economies are so fragile that central banks are still being called to the rescue.

Weakness in housing, automobiles, retail, and manufacturing combined with the lagged effects of the Fed’s tightening in 2018 could again weigh on the stock market this year. Another selloff might may be the catalyst that gold needs to break through its price range.

Newmont/Barrick: From supermajors to super-duper major… or not?

M&A activity in the gold industry may have peaked. It started with the September announcement of the friendly merger between Randgold Resources and Barrick Gold, which was essentially a reverse takeover that left Randgold’s management in charge of the new Barrick. Then, in January, Newmont announced a friendly takeover of Goldcorp, which  is scheduled for a shareholder vote in early April. In each case, the managements of Randgold and Newmont believe they can do a better job of creating value than the previous managements of their respective takeover targets.

Barrick and Newmont have spent the past five years downsizing by disposing of non-core properties, streamlining management, and strengthening their balance sheets. Now, in a stark reversal of strategy, they want to grow through mega-mergers. Newmont’s management style is akin to a modern corporate structure, while Barrick under Randgold is more decentralised and entrepreneurial. Each believes their respective management and assets are superior. We will look at their quarterly results for evidence of their success, or lack thereof, in unlocking value.  In time, we will find out if their focus on shareholder returns, operating discipline, and innovation are enough to ensure success, and whether one is more effective than the other. We hope competition in the free market brings out the best in both.

In addition to the considerable skills needed to manage so many mines, it may be geologically impossible to sustain a gold company that is as large as these companies are becoming. Barring mergers, the size of a gold company is fundamentally limited by geology. The tier-one properties (with low-cost reserves of over five million ounces) that make up the core of the supermajors’ portfolios are freaks of nature and extremely rare. Gold deposits are generally limited in size and often discontinuous, with chemistry and rock conditions that can be challenging to manage. Companies have been searching for tier-one gold deposits for nearly 200 years and the surface of the planet has been thoroughly explored. They must search deeper - with less success - as discoveries become fewer every year.

Barrick’s hostile no-premium bid for Newmont is contingent on cancelling the Goldcorp deal. Barrick believes it can unlock value in Newmont that would not surface if the Goldcorp transaction is allowed to proceed. This would create a super-duper major the likes of which have never been seen before in this business. Shareholders will soon decide whether Newmont is better off with Goldcorp or Barrick.

Barrick figures that roughly two-thirds of the added value of a merger will come from unitising its Nevada operations. Newmont and Barrick combined produce about four million ounces per year from the state of Nevada, one of the most prolific gold regions in the world. Within Nevada, Barrick has higher production and lower costs, while Newmont has more processing infrastructure. Without Nevada, most of the rationale for the merger disappears.

While we do not know whether Barrick’s bid for Newmont will be successful, it does focus attention on the potential gains that unitising Nevada would generate for both companies. My experience as a geologist in Nevada, and knowledge of the two companies, suggests there is significant value to be gained from merging their Nevada operations. However, given that shareholders do not have the data, resources, or technical expertise to comprehensively evaluate such a colossal project, they will have to rely on the managements to do the work for them. Newmont has released a Nevada joint venture term sheet in response to Barrick’s hostile offer, which the latter has yet to respond.  If these two adversaries cannot come to terms on Nevada, we call on them to prioritise their shareholders’ interests by publishing a joint definitive feasibility study that quantifies this value and articulates plans to unlock it. Once this is done, the best path forward should become obvious.

IMPORTANT NOTICE: Issued by VanEck Investments Limited ABN 22 146 596 116 AFSL 416755 (‘VanEck’). VanEck is a wholly owned subsidiary of Van Eck Associates Corporation based in New York, United States. VanEck Vectors ETF Trust ARBN 604 339 808 (the ‘Trust’) is the issuer of shares in the VanEck Vectors Gold Minders index ETF (‘US Fund’). The Trust and the US Fund are regulated by US laws which differ from Australian laws. Trading in the US Fund’s shares on ASX will be settled by CHESS Depositary Interests (‘CDIs’) which are also issued by the Trust. The Trust is organised in the State of Delaware, US. Liability of investors is limited. VanEck Associates serves as the investment adviser to the US Fund. VanEck, on behalf of the Trust, is the authorised intermediary for the offering of CDIs over the US Fund’s shares and issuer in respect of the CDIs and corresponding Fund’s shares traded on ASX.

This information contains general advice only about financial products and is not personal advice. It does not take into account any person’s individual objectives, financial situation or needs. Investing in international markets has specific risks that are in addition to the typical risks associated with investing in the Australian market. These include currency/foreign exchange fluctuations, ASX trading time differences and changes in foreign laws and tax regulations.  Before making an investment decision in relation to a fund, you should read the PDS and with the assistance of a financial adviser consider if it is appropriate for your circumstances. The PDS is available at or by calling 1300 68 38 37.

Past performance is not a reliable indicator of future performance. No member of the VanEck group of companies or the Trust gives any guarantee or assurance as to the repayment of capital, the payment of income, the performance or any particular rate of return from the US Fund.

An investment in the US Fund may be subject to risks that include, among others, competitive pressures, dependency on the price of gold and silver bullion that may fluctuate substantially over short periods of time, periods of outperformance and underperformance of traditional investments such as bonds and stocks, and natural disasters, all of which may adversely affect the US Fund. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates that may negatively impact the US Fund’s return. Small- and medium- capitalisation companies may be subject to elevated risks. The US Fund’s assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.

NYSE Arca Gold Miners Index is a trademark of ICE Data Indices, LLC or its affiliates (“ICE Data”) and has been licensed for use by VanEck in connection with the US Fund.  Neither the Trust nor the Fund is sponsored, endorsed, sold or promoted by ICE Data.  ICE Data makes no representations or warranties regarding the Trust or the Fund or the ability of the NYSE Arca Gold Miners Index to track general stock market performance.


Please note that the information herein represents the opinion of the author, but not necessarily those of VanEck, and this opinion may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

Published: 05 March 2019