Barrick-Newmont Fallout Overshadows Exit of Founder MunkLiezel Hill
John Thornton’s start tomorrow as chairman of Barrick Gold Corp., succeeding founder Peter Munk at the largest gold producer, is being overshadowed by the acrimonious failure of merger talks with its biggest rival and opposition to executive compensation plans.
Barrick and Newmont Mining Corp. yesterday traded accusations in a series of statements, accusing each other of scuppering a deal. Newmont called talks with Thornton on key issues “unproductive,” while Barrick said Newmont reneged on key points of the proposed deal after they had been agreed upon.
Separately, two of Canada’s largest pensions funds said they will oppose Toronto-based Barrick’s pay arrangements. It’s the second successive year that Barrick investors have criticized as excessive the miner’s plans for rewarding senior managers.
Since he was appointed co-chairman two years ago, Thornton has helped Barrick with its long-term strategy, most recently leading efforts to achieve a deal with Greenwood Village, Colorado-based Newmont. It’s the latest of several attempts over more than two decades to merge the companies and realize cost savings from combining adjacent Nevada operations.
While it’s positive that Thornton was trying to make his mark at Barrick, “the fact that it wasn’t consummated, and dirty laundry was exposed in a public way, I don’t think is very positive,” said Chris Mancini, an analyst for Rye, New York-based Gabelli Gold Fund, which holds shares in both miners. “It’s not a good start to the chairmanship.”
Barrick and Newmont identified annual savings of $1 billion in their talks this month about an all-stock transaction, in which Barrick would offer Newmont shareholders a takeover premium of 13 percent, two people with knowledge of the matter said April 19.
A deal would have marked a swan song for Barrick’s Munk, 86, who will retire at the annual shareholders’ meeting tomorrow, and a bold first move by Thornton.
Instead, the public disintegration of the negotiations may threaten to undermine Barrick’s efforts toward rebuilding investor confidence following a tumultuous couple of years. The company fired its chief executive officer in 2012 after reporting costs had ballooned at a mining project on the Argentina-Chile border. A plunging gold price squeezed profit margins and led to $11.5 billion of after-tax writedowns last year.
In the past 12 months, Barrick has sold about $1 billion of assets, reworked mine plans to focus on its most profitable ore and raised about $3 billion in a share sale to reduce debt. CEO Jamie Sokalsky’s mantra since succeeding Regent has been to let returns drive production, not the other way round. The company’s forecast for 2014 production of 6 million to 6.5 million ounces would be the lowest in nine years.
Barrick also has announced changes to its board to increase the number of independent directors. It published a new executive pay policy in March, after Canada’s largest pension funds criticized compensation last year for being too high.
Still, Canada Pension Plan Investment Board, the country’s largest pension manager with less than a 0.1 percent stake, said on its website it will oppose Barrick’s pay practices. British Columbia Investment Management Corp. said yesterday it will vote against.
The two funds were among Barrick investors who said last year the company’s compensation was excessive after Thornton got an $11.9 million signing bonus. Barrick said yesterday it has “strong” investor support for its plan and proxy advisory services Institutional Shareholder Services Inc. and Glass Lewis & Co. advised shareholders to vote for it.
Barrick will probably reach a merger agreement with Newmont at some point, said Patrick Chidley, a New York-based analyst at HSBC Securities USA Inc. A deal seems logical and the cost savings couldn’t be achieved by combining with anyone else, he said.
“Barrick was very keen on this deal,” he said. “The deal is one of the best avenues that they have and Newmont is in the same boat.”
Barrick rose 1.6 percent in Toronto in the 12 months through yesterday, while Newmont fell 26 percent in New York and the Philadelphia Stock Exchange Gold and Silver Index declined 14 percent. Gold traded in London was down 15 percent and was little changed at $1,295.90 an ounce today.
Last year was difficult for gold producers after the price of the metal fell the most in three decades. Newmont had a $2.46 billion net loss in 2013 on sales of $8.32 billion. Barrick posted a net loss of $10.37 billion on revenue of $12.5 billion. Barrick reports first-quarter earnings tomorrow.
Newmont’s production forecast this year is for 4.6 million to 4.9 million ounces of gold. Both companies also produce copper from some mines.
The first of yesterday’s public recriminations came with Newmont’s publication of an April 25 letter from Newmont to Barrick’s board in which it referred to Thornton’s conduct. Newmont also said comments made by Munk suggested there wasn’t the “mutual respect” required for a deal.
In response, Barrick said that after Newmont signed a term sheet on the proposed merger, it tried to back out on agreements regarding the location of the new company’s headquarters in Toronto, the specific assets to be spun off after the deal, and the roles of the chairman, CEO and lead director. Newmont denied it reneged on agreements.
A spinoff of lower-quality assets is a vital part of a successful merger, said Jorge Beristain, an analyst at Deutsche Bank AG in Greenwich, Connecticut.
“You can’t just have a bigger and bigger gold company that gets more and more difficult to manage,” he said.