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Mega-Merger Hurdles Hit Profit at World’s Largest Gold Miner

Mega-Merger Hurdles Hit Profit at World’s Largest Gold Miner

(Bloomberg) -- The world’s largest gold miner is experiencing some growing pains as it tries to integrate a slew of new assets from its recently completed mega-merger.

Newmont Goldcorp Corp.’s shares fell after it posted an adjusted profit that was about half what analysts were expecting in a messy second quarter that included its merger with Goldcorp Inc. and the start of a new joint venture with rival Barrick Gold Corp. in Nevada.

Although there have been “no surprises” in the acquired Goldcorp assets, underinvestment has been an issue throughout the portfolio, Newmont President Tom Palmer told analysts Thursday on an earnings call. “There was not the work done on exploration, there wasn’t the work done on development, and that’s absolutely fundamental in either an open pit or an underground mine.”

While Newmont is bringing technical rigor and discipline to the newly acquired mines, optimizing them will take time, said Palmer, who is slated to take over as Newmont’s chief executive officer on Oct. 1. “It’s going to take us 24 to 36 months to really get those assets performing to the level that we’d expect, but the underlying infrastructure, the underlying ore bodies, are really good,” he said in a phone interview.

In its earnings statement, the Greenwood Village, Colorado-based company cited a number of cost pressures that eroded earnings, including:

  • Integration costs associated with the Goldcorp merger and the Nevada JV
  • Higher costs due to shutdowns at two mines acquired in the Goldcorp deal, Penasquito and Musselwhite
  • Higher sustaining capital investments for the Goldcorp assets
  • Higher spending for growth projects

In April, Newmont warned that a serious fire at the Musselwhite mine in Canada at the end of the first quarter could affect guidance. The blaze affected the full 2.5-kilometer (1.6-mile) length of the conveyor system, Palmer said on the call. Meanwhile, a blockade at the Penasquito mine in Mexico in the second quarter lowered production and hiked costs, Newmont said in the statement.

‘Very Confident’

Newmont now expects consolidated production of 165,000 ounces of gold from Penasquito in 2019. Last year, the mine produced 272,000 ounces of gold for Goldcorp. Newmont is forecasting zero production at Musselwhite this year and doesn’t expect the mine to be fully operational until mid-2020. In 2018, it produced 205,000 ounces of gold.

The company said its full-year gold production will be 6.5 million ounces, which compares with a June forecast for 7 million ounces in 2019 and 7.4 million in 2020. The company is “very confident” it can achieve that guidance, Palmer said, noting that guidance for next year will be provided in December.

The lack of clarity about next year could worry investors, Anita Soni, an analyst with CIBC World Markets, said in a research note. “No further 2020 outlook was provided, which will likely be an overhang on the stock given the uncertainty surrounding the production profile for the recently acquired Goldcorp assets,” she said.

Shares Drop

Newmont fell 2.7% to $38.25 on Wednesday in New York, reducing its year-to-date gain to 10%.

Outgoing CEO Gary Goldberg said the company is still planning to divest $1 billion to $1.5 billion worth of assets as it optimizes its new portfolio but doesn’t have a timeline for the sales.

“We’ve had lots of expressions of interest in a variety of things, many of which don’t fit the category of things we’d like to sell -- so the answer is pretty quick on those,” he said in a phone interview.

The company is planning to keep the Penasquito, Cerro Negro, Musselwhite and Eleonore mines, he said, but needs to gather more information -- especially around exploration potential -- before deciding what it might sell. Some smaller exploration assets could be sold “sooner rather than later,” Goldberg said.

There is potential for enormous long-term value from four potentially multibillion-dollar projects: NuevaUnion, Norte Abierto, Galore Creek and Yanacocha, Palmer said. “And then we’ve got a whole bunch of other medium-sized projects that sit alongside them.”

As the company integrates the two portfolios, and works with Barrick on a joint venture in Nevada, it needs to make sure it manages execution risk and capital spending risk, he said.

“We need to step back and look at our project pipeline and make sure we are prioritizing and sequencing those projects for the long term,” Palmer said.

In the wake of the merger, Newmont said in a presentation its rationalization of Goldcorp’s former head office in Vancouver had saved it $40 million in labor costs so far, as well as $10 million in “non-labor synergies.”

A company spokesman said the Vancouver headcount is shrinking from 174 to a range of 140 to 150, with most of cuts comprised of former Goldcorp executives, accounting for the $40 million.

“There’s lots of other external services that you no longer use because you’re no longer a headquarters, so you’re starting to see that flow through,” Palmer said in the phone interview.

--With assistance from Aoyon Ashraf.

To contact the reporter on this story: Danielle Bochove in Toronto at dbochove1@bloomberg.net

To contact the editors responsible for this story: Luzi Ann Javier at ljavier@bloomberg.net, Steven Frank, Joe Carroll

©2019 Bloomberg L.P.