Is Newmont Mining’s Goldcorp Acquisition in Trouble?

Newmont Mining [stock_market_widget type="inline" template="generic" color="default" assets="NEM" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] is in the process of acquiring Goldcorp [stock_market_widget type="inline" template="generic" color="default" assets="G.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] in a $10 billion deal to create what would become the world’s largest gold producing company. Newmont management believes that this merger is so good that it rejected Barrick Gold’s hostile bid, claiming that the Goldcorp acquisition will create a lot of synergies for shareholders, worth as much as $4.4 billion.

However, not all shareholders seem to be sharing that view.

Opposition in the Ranks

Paulson believes that Newmont’s offer will erode shareholder value given the way the deal is currently structured.

Paulson and Co. owns 14.2 million shares of Newmont, accounting for slightly less than 2.7% of the company’s outstanding float. Paulson believes that Newmont’s offer will erode shareholder value given the way the deal is currently structured.

More specifically, Paulson believes that Newmont needs to reduce its offer price by 23% in order to ease concerns regarding valuation. It should be noted that Newmont’s original bid for Goldcorp was made at a 17% premium to the latter’s stock price at that time.

Paulson, however, isn’t the only one against the terms of the deal. VanEck, another notable Newmont shareholder, shares Paulson’s concerns regarding the value of the transaction. VanEck portfolio manager Joe Foster told Bloomberg that Goldcorp investors will unfairly benefit from Barrick’s joint venture with Newmont in Nevada.

The JV deal was negotiated after the Newmont-Goldcorp deal was announced, so Goldcorp shareholders will be at an unfair advantage when they reap synergies from the same. Additionally, Newmont shareholders aren’t pleased with the massive payouts Goldcorp’s executives will receive after the merger.

For instance, Goldcorp chairman Ian Telfer’s retirement allowance has shot up from $4.5 million to $12 million. He was earlier expected to serve on the board of Newmont as deputy chairman, but Telfer has declined the new job.

Because of such terms, British Columbia Investment Management, which owns 3.85 million Goldcorp shares along with a small position in Newmont, has decided to vote against the transaction. So, with opposition arising from several quarters, there is a possibility that the deal could be in danger.

Bloomberg reports that “VanEck held 5.9% of Newmont shares and about 6.2% of Goldcorp shares outstanding at the end of 2018.” Newmont investors are scheduled to vote on the transaction on April 11.

Poor Performance is Another Concern

Goldcorp’s poor operating performance is turning out to be another bone of contention for investors like Paulson. The hedge fund believes that the premium Newmont is paying is uncalled for given its declining production and unfavourable cost profile.

Goldcorp’s 2018 production was down 10.7% to 2.3 million ounces of gold. At the same time, the company’s cash costs increased to $548 per ounce from $499 an ounce in the preceding year. This seems to be a problem for Newmont investors, who believe that Goldcorp shareholders will be better off in this deal, especially considering the latest tie-up with Barrick in Nevada.

It’s possible the deal can face hiccups on its way to completion, which is why Goldcorp shares have started losing value on the stock market of late.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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