Homestake is no glittering prize for Barrick
By Cheryl Strauss Einhorn
Last week's takeover of Homestake Mining by Barrick Gold says two important things about the
acquirer, notes Sanford Bernstein mining analyst John Tumazos: that Barrick's stock is overpriced
and that the company has "a lack of better opportunities."
Tumazos thinks this acquisition is out of character with the kinds of deals Barrick has done in the
past and therefore doesn't make much sense. "We view Barrick's purchase of Homestake as less of
a leap forward to access new assets than its other purchases," says Tumazos. He rates the
company's shares "underperform," given its "premium valuation to its peer group"; Barrick trades at
an enterprise valuation of $115 to $120 per ounce of recoverable gold versus its peers' values near
$80. He is also concerned about Barrick's ability to replace its reserves.
As for Homestake's shareholders, he says "they are taking Barrick's overvalued stock the month
pooling transactions end, at the time when gold prices stink, to save $55 million in costs because it
is hard to make money now." Pooling transactions allow companies to avoid major write-downs
against earnings.
Investors seem to agree. Since the announcement before the stock market opened last Monday,
Barrick's shares have traded down 6.3%. Homestake's are up about 16% during the same time
period to almost $8 per share, in part because Barrick has offered about $8.31 per Homestake
share.
To be fair, that may account for part of the drop in Barrick's share price. Barrick will be issuing 140
million new shares as part of its deal, and thus the dilution should have some downward price
pressure on the company's stock price.
Still, the stock deal, which is valued at $2.2 billion and should close during the fourth quarter of this
year, seems a bit lackluster. After all, Barrick traditionally has purchased small companies with
undeveloped properties that show strong gold reserve potential. Homestake, by contrast, is a
125-year-old company with a declining asset base; the company is scheduled to close five of its
mine sites this year, including its namesake Homestake mine in South Dakota. As a matter of fact,
Tumazos estimates that Homestake's 2010 output will only be 35% of the two million ounces it
produced in 2000.
Barrick's 2010 output is also projected to decline -- that is, if it does not develop its Pasqua mine
project in the Andes, which has been put on hold, or doesn't make any acquisitions. Tumazos
estimates Barrick's output will fall in 2010 to about 53% of its 2000 output, which was about four
million ounces.
So why the deal? Barrick chief executive Randall Oliphant says it was because Homestake's head
honcho called him two weeks ago and offered the company for sale. "Homestake was exploring its
options, and we said we were interested," he says.
Is that so bad? After all, the combined company should be able to realize $55 million in synergies,
which is the equivalent of $9 per ounce of production costs. That's no small shakes given that gold
prices, at a current $273 an ounce, have remained stubbornly depressed during the past few years,
falling near their lowest levels in 20 years earlier this year.
All mining companies need to do everything possible to lower their costs and improve their returns
on capital -- even Barrick which produces gold at a cash cost of $145 per ounce, making it the
low-cost producer in the industry. Homestake's costs have been closer to $174 per ounce.
Additional savings are likely for projects like the one the two companies share atop the Andes,
which is 60% owned by Homestake and 40% owned by Barrick. By putting their resources
together, the newly combined entity will be able to combine its operations at the site and only
develop one plant to handle the production.
As such, the company says the deal should be accretive to earnings next year. Tumazos is skeptical,
however. He has lowered his 2002 estimate to 62 cents per share, down from 69 cents.
As for the future of gold prices, they probably won't be aided much by this deal except in one
unfortunate way: The new company will not be shuttering any capacity. Together, the new Barrick
will produce six million ounces of gold a year, making it second only to South Africa's Anglogold
in terms of annual production. "The industry has no return-on-capital standards," says Tumazos.
"They are like six-year-olds, playing with their trucks and digging up the dirt." |
