The WSJ analysis
June 26, 2001
Barrick Gold Agrees to Buy Homestake
In a Stock Deal Valued at $2.2 Billion
By Mark Heinzl
Staff Reporter of The Wall Street Journal
TORONTO -- Barrick Gold Corp., in a deal that would make it the world's second-biggest gold producer, agreed to acquire venerable gold concern Homestake Mining Co. for $2.2 billion in stock.
The move underlines the continued depressed condition of gold-mining stocks, which has made it cheaper in recent years to boost production by buying other companies rather than by exploring for more gold.
But for Barrick, already one of the industry's biggest and lowest-cost gold producers, quality acquisitions are hard to come by. Indeed, some analysts fretted that purchasing Homestake would increase Barrick's operating costs and hurt the company's earnings.
Barrick is offering 0.53 of a share for each Homestake share. That equals $8.31 for each Homestake share, a premium of 25% over Homestake's 4 p.m. Friday price of $6.65. Monday, Homestake shares were up $1.40, or 21%, at $8.05 at 4 p.m. in New York Stock Exchange composite trading; meanwhile, Barrick shares were down 75 cents, or nearly 5%, at $15.68 in NYSE composite trading.
Barrick historically has grown through acquisitions, but mostly has sat on the sidelines in recent years amid chronically weak gold prices and stagnant earnings for most gold producers. Barrick, based in Toronto, is bidding for Homestake at a time when the Walnut Creek, Calif., company's shares trade for less than half their value of a few years ago.
Barrick Chief Executive Randall Oliphant said the combination would create one of the world's largest, most profitable, lowest-cost gold producers and "a strong participant in any further consolidation" in the gold sector. A combined Barrick and Homestake would rank second only to South Africa's AngloGold Ltd. in terms of annual gold production, Barrick said.
Barrick officials said the acquisition is expected to be accretive to earnings next year, as an estimated $55 million of duplicate costs are cut and tax benefits realized. Additional future savings are likely for certain projects in the development stage, such as the Veladero project in Argentina, currently 60%-owned by Homestake and 40% by Barrick, officials said. The companies estimate Veladero contains about 5.5 million ounces of gold.
Gold prices, now at about $273 an ounce, have slid steadily from more than $380 five years ago. Homestake has focused on cutting costs in recent years, an effort that likely would continue within Barrick, analysts said.
"At very low gold prices, these companies need every penny of economy," said John Tumazos, an analyst with Sanford C. Bernstein. In that vein, Barrick's interest in Homestake is largely in combining their interests in Argentina, he said. "The operating synergies lie atop the Andes," said Mr. Tumazos.
For Homestake, the acquisition is "bittersweet," since it means the end of independence for the 125-year-old company, said Jack Thompson, Homestake's chairman and chief executive. Mr. Thompson, who is expected to join Barrick's board, said he began discussions by calling Barrick's Mr. Oliphant about two weeks ago.
Fittingly, Homestake is closing its namesake mine in South Dakota at the end of this year, as well as four others during the next year or two, due to high costs and depleted reserves, Mr. Thompson said.
Mr. Thompson said looming changes to accounting rules helped motivate the acquisition talks. Companies have until the end of this month to announce business combinations that qualify as a "pooling of interests," in order to avoid major write-downs against earnings, he said.
A combined Barrick and Homestake last year would have produced about 5.95 million ounces of gold, compared with the 3.74 million ounces Barrick produced alone. However, Barrick's cash operating costs, at $145 per ounce last year, would rise to $156 an ounce. On its own, Homestake has cash operating costs of $174 an ounce.
"I don't see what it does to create value for the Barrick shareholders," HSBC Securities analyst Victor Flores said of the Homestake acquisition. He said it is "pretty unlikely" that another company will bid for Homestake, given the size of the transaction and the premium Barrick is paying.
Barrick earned $334 million, or 84 cents a share, last year, excluding a $1.1 billion one-time provision recorded to reduce property values, on revenue of $1.3 billion. The company's flagship Goldstrike mine is in Nevada, and it operates other mines and development projects in South America and Canada. Homestake has mines and development projects in the U.S., Australia, Canada and South America.
During a conference call to discuss the deal, some Homestake investors also voiced concerns over Barrick's so-called hedging strategy, where the company contracts to sell much of its future gold production at set prices to reduce risk. Hedging has produced hundreds of millions of dollars of added revenue for Barrick over the years. Homestake has hedged some production recently, but the company traditionally has been a favorite among gold bugs seeking to play any price rise. Barrick's Mr. Oliphant said he doesn't plan to raise the hedging position on Homestake's gold production.
The acquisition is subject to Homestake shareholder approval. Barrick said shareholders who collectively own 12% of Homestake's shares have agreed to the deal.
-- Chip Cummins in Dallas contributed to this article.
Write to Mark Heinzl at mark.heinzl@wsj.com
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