Barrick Gold Corp. (ABX) and Newmont Mining Corp. (NEM:US), the world’s largest gold producers, will consider a cooperative venture in Nevada in a sign of how far companies will go to cut costs after the metal’s plunge.
Barrick Chief Executive Officer Jamie Sokalsky and Newmont CEO Gary Goldberg said in separate interviews they would weigh holding talks on finding efficiencies in their operations in Nevada. They said it’s something that has been discussed previously. According to Sokalsky, the “next-door neighbors” could combine those assets into a single, independently managed joint venture with separate ownership of the respective assets.
The biggest quarterly drop in gold’s price in more than 90 years and rising production costs have forced mining companies to fire workers, close inefficient operations and cut dividend payments. It would be positive for both Barrick and Newmont if they found new ways to get rid of inefficiencies by cooperating in Nevada, said Chris Mancini, an analyst for the Gabelli Gold Fund.
“You could get millions and millions of dollars of synergies,” he said in an interview in Denver. “In today’s environment with gold and gold mining companies, we need that.”
An agreement in Nevada would add a chapter to the shared history of Barrick and Newmont. The two companies held merger talks in 1991 and 2000, according to “Going for Gold: the History of Newmont Mining Corporation” by Jack H. Morris (2010, The University of Alabama Press).
Further discussions took place as recently as the past five years, according to a person with knowledge of the discussions who asked not to be named because the talks were private. Spokesmen for Barrick and Newmont declined to comment yesterday on the potential for a merger.
Both companies built out their businesses on production from mines in northern Nevada, where they have the largest concentration of neighboring mines in the area known as the Carlin Trend. The zone, which is more than 50 miles (80 kilometers) long and 5 miles wide, has produced more than 70 million ounces of gold since the 1860s, according to the Nevada Bureau of Mines and Geology website.
“It’s conventional wisdom that there’s some synergies out there any time there’s adjacent properties, and this is one example,” said Jason Neal, the Toronto-based co-head of metals and mining at BMO Capital Markets.
“The overall investor mood out there is to try and find ways to overall increase efficiency,” Neal said in an interview at the Denver Gold Forum, an annual industry conference in the city. “Senior executives, they genuinely are out there looking for those opportunities without a whole lot of restraint.”
Gold, which fell into a bear market in April, has tumbled 24 percent in the past year.
Sokalsky is selling assets and closing mines in a bid to boost profits and reduce costs, which crept up steadily over the past decade. The Toronto-based company cut 30 percent of corporate office staff, slashed spending plans and continues to seek savings, Sokalsky said. Working with Newmont in Nevada could help toward that goal, he said this week.
“In an environment like this, having discussions jointly where you can save costs, you’d have to be interested,” Sokalsky said in a Sept. 24 interview in Denver. “One of the ways to do that would be to combine the operations into a joint venture and then manage it as a single venture with separate ownership.”
Goldberg said in Denver this week his company will consider partnerships on acquisitions and could cooperate with other companies on developing infrastructure for a project in Peru.
Goldberg, who took over as CEO in March, said there are some overlaps between the companies’ Nevada operations and opportunities for cost savings, something that’s “worthy of more conversations.”
Newmont, based in Greenwood Village, Colorado, took a $1.77 billion writedown in the second quarter. Its shares (NEM:US) have fallen 39 percent this year in New York, a bigger decline than the 20 percent drop in the price of New York gold futures.
In that time, Barrick has plunged 45 percent in Toronto and took $8.7 billion of writedowns in the second quarter.
Newmont has 18 mines in Nevada, while Barrick owns six and operates another three as joint ventures, according to their websites. The companies already jointly own the Turquoise Ridge mine 45 miles west of the Carlin Trend, with Barrick controlling 75 percent. The companies also are 50-50 partners in the Kalgoorlie mine in Australia.
Goldstrike, Barrick’s biggest mining operation, which it bought for $65 million in 1987 according to Morris, is surrounded on three sides by Newmont mines. Multiple pits, pools and roads form a complicated pattern on a 20-square-mile patch of Nevada hills. Both companies have processing facilities in the area.
Barrick and Newmont would be able to optimize their operations if they were to cooperate in Nevada, said Rachel Benepe, who helps manage $1.4 billion at First Eagle Investment Management LLC. The current gold price environment is pushing all miners to rethink their operations, she said.
It’s “forcing them to think about their business models, it’s forcing them to think about what they’re good at comparatively,” Benepe said in Denver Sept. 24.
There has been more dialogue among company executives in the last couple of years on what needs to be done to fix the industry, said Sean Boyd, vice chairman and CEO of Toronto-based competitor Agnico Eagle Mines Ltd.
“If Barrick and Newmont actually finally do cooperate in Nevada, which was something that was talked about for a long, long time, that’s a great sign for the industry,” Boyd said yesterday in an interview in Denver. “Because it’s all about synergies and doing things on a more cost-effective basis.”
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