Comparing Barrick (ABX) and Newmont (NEM)

July 29th, 2016 by

Barrick Gold (ABX) and Newmont Mining (NEM) are the world two largest gold mining firms. Each has a market cap well over $20 billion.

For years, these two competitors have provided a useful point of comparison for investors in gold mining stocks.

Partners or Rivals?

An interesting and long-standing development between the two gold mining giants is the fact that they have frequently discussed the possibility of a merger. The proposal to combine the top two gold miners in the world reached serious levels in both 1991 and 2000. Later, there were intermittent merger talks between 2009 and 2014. None of these exploratory M&A discussions resulted in a deal.

open-pit-mining-261092_960_720Moreover, Newmont and Barrick share a 50-50 split in ownership of the Kalgoorlie gold mine (known as the Kalgoorlie Super Pit) located in Western Australia. This site has been one of history’s most productive gold deposits, remaining active for more than a century. However, its output is slowly but surely dwindling: it likely only has about seven years of life left at the current pace of gold production (more than 600,000 troy ounces annually).

Barrick Gold is now actively looking to sell its 50% stake in the Kalgoorlie project because it has other assets that yield higher gold output (in terms of ounces) at lower costs. (Likewise, Newmont can also boast more efficient, higher-yield mines in its portfolio.) Nonetheless, the buyer who has expressed the most interest in snatching up Barrick’s ownership stake is none other than Newmont.

Strong 2016 Performance

The 2016 calendar year has been kind to the entire gold mining sector virtually from the start. There have been many speculative plays on junior gold miners that have sent these stocks up more than 100%.

One advantage that Newmont enjoys over its biggest counterpart is less leverage: While Barrick’s net debt constitutes 68% of the value of its equity, Newmont’s proportion of debt to equity is a much more reasonable 18%. This more attractive degree of leveraging helped Newmont post gains that outpaced Barrick during the early part of the year.

mine-wagonHowever, more recently, Barrick has simultaneously been able to cut its debt load significantly while attracting major investments from billionaires like George Soros. Over the past year, Barrick has shed some $4.5 billion in debt, representing 40% of its previous total.

Bloomberg columnist David Fickling explains, “When commodity prices slump and default risks rise, fretting about leverage makes sense. When conditions improve, though—and spot gold is up 26 percent so far this year—resource quality comes to the fore again.”

Even though it’s more leveraged than Newmont, Barrick arguably has the industry’s highest-quality portfolio of assets. It is the world’s largest gold miner, after all. Over the past month, Newmont shares are up 8.8% from their low over that time; meanwhile, Barrick has seen share prices rise 12.8% from their low during that same period.

Fickling sums it up aptly: “The quality of a miner’s debts may wax and wane but the quality of its assets endures.”

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.