Source: Adrian Day for Streetwise Reports 03/12/2019
Money manager Adrian Day reviews the latest developments in the Goldcorp acquisition saga, noting as the story unfolds, insiders quietly line their pockets.
Newmont Mining Corp. (NEM:NYSE) is proceeding with its bid to acquire Goldcorp Inc. (G:TSX; GG:NYSE, US$10.71) after Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) made an unfriendly bid for Newmont. Barrick, which only recently acquired Randgold to vault to #1 in the rankings of largest gold companies in the world, launched the bid after talks to merge its and Newmont’s Nevada assets—talks which have been on and off again for the past 20 years—failed, and Newmont bid for Goldcorp. Barrick has made it plain it does not want Goldcorp, hence the timing of its bid. It is also possible that the hostile move is an attempt to focus Newmont’s mind on a meaningful alliance of their Nevada assets on Barrick’s terms.
Goldcorpse, as its detractors mockingly call it, agreed to sell itself at a measly premium at a time when its stock was trading at a price not seen since early 2002. We are still holding Goldcorp because if the merger with Newmont succeeds, the stock should see a bounce. It has already jumped from the $9.70 price at the time of the bid, and in a good gold market, the combined company should see investor interest. As a standalone company, Goldcorp continues to offer mediocre returns. In the latest quarter, EBITDA (earnings before interest, taxes, depreciation and amortization) was down, despite the higher gold price, largely on high G&A (general and administrative) costs.
Barrick and Newmont have synergies, while Goldcorp offers none
However, a Barrick-Newmont merger is clearly the superior move, given the tremendous and real synergies that exist in such a hook-up, mostly, but not only, in Nevada. Barrick estimates cost savings of $7.1 billion over the next two decades, with just under $5 billion from Nevada. There are simply no real synergies in a Newmont-Goldcorp merger, one of the reasons analysts have been lukewarm. Initially, Newmont estimated costs savings from a merger of $100 million, and after analysts called this a “rounding error” for a company of that size, Newmont said that after looking more carefully, they think they can save $200 million. Excuse me for being skeptical, but this nice big round number hardly gives the appearance that a sharp pencil has been used in this exercise.
So, either Barrick will gain control of Newmont—not as unlikely as many seem to think, given that Barrick’s key shareholders also own large positions in Newmont—leaving Goldcorp at the altar, or Newmont will acquire Goldcorp, leaving Barrick with the option to continue with its hostile bid, but of the combined company.
In the meantime, Goldcorp insiders are making sure they gain big-time if the acquisition goes through. We have already discussed that, according to the Shareholders’ Gold Council, failed CEO David Garofalo could receive as much as CA$11 million in payments, in addition to his bloated salary, while shareholders have lost 26% during his watch. Let me be clear: I understand executives joining a company may want some security. I also have no problem with rainmakers being well rewarded, but for success and not for failure.
Now the information circular supporting the Newmont bid, released Thursday, shows that another 25 officers of Goldcorp will receive change-of-control payments. The company estimates these will total over $33 million, not counting freebie stock and options.
Reward for a job well done?
But grossest of all is a “lump sum payment retirement allowance” made to chairman Ian Telfer. “In contemplation of the Arrangement (to be acquired),” Telfer and the company agreed to almost triple his payment from $4.5 million to $12 million (U.S. dollars). The rational is that when the payment was approved in 2006, it was not indexed to inflation. The circulate blithely notes that “other than his salary and (annual freebie shares) Mr. Telfer did not receive any other benefits from Goldcorp.” My heart goes out to him.
Since 2006, shareholders have lost two-thirds of their investment. Shareholders’ investments were not indexed to inflation. And other than a miniscule dividend (less than 1%), shareholders have “received no benefit” from Goldcorp, either.
To triple Telfer’s payment right before the acquisition is one slap in the face too many, an insult to shareholders. We intend to vote against the merger with Newmont if this payment is not rescinded. We have no voice in these payments, so this is our only way to make our position clear.
Shareholders vote with the money
Is it any wonder that generalist investors look at this space and steer clear, seeing these shenanigans against a background of stock prices lower today than at the beginning of the bull market, despite a quintupling in the gold price? Twenty years ago, hardly a generalist fund—small cap, large cap, value or growth—did not have exposure to gold mining shares. Today, hardly any does. Is it any wonder?
Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is “Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks.”
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( Companies Mentioned: ABX:TSX; GOLD:NYSE,