Gold continues to face an uncertain outlook, according to the latest survey from Reuters/GFMS, a forecast that goes some way to explaining the thinking behind the attempts by Newmont and Barrick to merge to produce the world’s biggest gold miner in a $US33 billion deal.
The two giants (numbers one and two in the world) are reported to have come close to agreeing on a merger just before Easter, with the idea of announcing it today. Later reports say the deal could still be revived in the next few days to be formally announced next week.
The deal reportedly fell apart when the two companies couldn’t agree on what mines to include in a spin-off of operations of both companies considered to be non-essential.
The spin-off would have been based on the Australian and NZ mines owned by both companies.
The spin-off company would give Newcrest (NCM) a run for its money as the biggest miner in Australasia with around 2.4 million ounces of annual production – just ahead of Newcrest’s 2.3 million.
Newcrest releases its March quarter production report in Australia tomorrow, our time, and management will no doubt be questioned about the merger plans of the world number one and two.
A merger of the Barrick and Newmont’s Australasian operations would probably have a market value close to the $A7.8 billion Newcrest was valued at, based on Thursday’s closing price of $10.24.
If listed in Australia it would increase the attractions of the listed gold mining sector for local investors, as well as global players.
It could also see speculation emerge that Newcrest and the spin-off company might become merger partners down the track.
The reasons for the merger aren’t hard to find – the 28% fall in the gold price, rising costs and the weak outlook for the metal, despite this year’s price rise.
The 2014 gold price survey, released last week by Reuters/GFMS, provides a timely update of the indifferent outlook for the metal – the bottom line being price fluctuations around current levels for the next year or more, underpinned (for miners of all sizes) to cut costs.
In media reports of the merger deal that Barrick and Newmont were talking about, the spin-off would have been a major part of cost-cutting (but getting rid of higher cost, weaker margin operations).
In their 2014 update on gold (the 47th), Reuters/GFMS said gold would have an average price this year around $US1,225 an ounce, 6% below yesterday’s price of $US1,290, and 13% down on the 2013 average of $US1,410.
"The price is expected to post 2014 lows in mid-year, with a fundamentally-driven rally thereafter, but this is likely to peter out in early 2015," Reuters GFMS forecast last week.
“The fundamentals pure and simple point to a trading range of $1,200-$1,300 in the short term. There is, however, a distinct possibility of a slump towards $1,100, while as the year unfolds, seasonal strengthening physical demand could then propel prices towards $1,400 again.
"Investor appetite is not strong, however, and without this important element the price is expected to resume a downward course in 2015,” the report said.
Looking at supply and demand, the report said, “This year’s Survey identifies physical demand (including official sector purchases) at an all-time high in 2013 of 4,957 tonnes, a 15% increase over 2012 and some 703 tonnes higher than the supply of new gold and scrap during the year."
"While demand is forecast to outstrip new gold plus scrap supply in 2014, the market is expected to be closer to fundamental balance than last year.
"The first part of 2014 has witnessed a rebound in the gold price, with a rally from a closing pm fix in 2013 of $1,199.00 to reach $1,385.00 on 14th March 2014. This was driven in part by short covering after speculative sale is the final weeks of 2013, and aided by the geopolitical tensions in the CIS.
"Thomson Reuters is expecting a downward drift to resume through the middle of the year as investors concentrate on US monetary policy and as Treasury yields rise, while the prospects of economic recovery also point to equities as a more attractive asset class than gold," the report forecast.
So no price surge in sight and for miners of all sizes, cost containment cutting will be the order of the day, just as it has been for the past year or more.
The media reports said the Barrick and Newmont proposed merger had identified cost-savings of more than $US1 billion.
Barrick operates mines in Argentina, Chile, Canada, Australia, the Dominican Republic, Papua New Guinea, Peru, the US and Zambia. It also owns 64% of African Barrick Gold Plc, a producer in Tanzania that was spun out of Barrick in 2010, and has a stalled mine in Saudi Arabia.
Newmont operates in the US, Australia, Peru, Indonesia, Ghana, New Zealand and Mexico. The two miners own the huge low cost Superpit at Kalgoorlie in Western Australia. Barrick and Newmont already jointly own the Turquoise Ridge mine in Nevada, with Barrick having a 75% stake.
The deal with Newmont would have been a dramatic final move by Barrick founder and Chairman Peter Munk, who is due to retire at the April 30 annual meeting. The 86-year old Munk has driven Barrick to the top of the pile in the gold sector and this deal was aimed at cementing his record.
The merger would have been an all share deal with Barrick offering a modest premium of around 13% for each Newmont share.
The key to the future of the merged company in fact lies in Nevada where both produce more than a third of their gold. From the media reports that’s where the bulk of the cost savings will come from (after the impact of the spin-off of the mines in Australasia and perhaps elsewhere).
In 2006, Barrick acquired 2006 Placer Dome Inc. for $US10.2 billion, which made it the biggest gold producer in the world. That deal remains the record for the gold industry.
Shares in Newmont rose 6.4% in New York in early trading overnight, while Barrick shares lost 3.9%.
Investors concluded initially that Barrick and its shareholders will be the loser from any merger.
