Goldcorp Inc. (G:TSX; GG:NYSE, US$10.80)) is being acquired by Newmont Mining Corp. (NEM:NYSE) in an all-share transaction (0.3280 of a Newmont share for each GG share), at a modest 13% premium. The shares jumped $0.70 on the news.
The combined company will be the largest gold company in the world, surpassing the combined Barrick-Randgold. The combined company, to be called Newmont-Goldcorp (but for how long?) will have a strong pipeline and diversified asset base. But, in my opinion, there are few synergies and no operational ones. Newmont claims $100 million of savings, essentially a rounding error for a company this size. Newmont will sell some assets to reduce the debt it acquired with Goldcorp. It will also cut some Goldcorp-reported reserves to resources, including, I should think, the 11.6 million ounces of "reserves" at Cerro Cassale. (Calling these ounces "reserves" demonstrates a certain elasticity in definition.) The main potential of the merger comes from Newmont's ability to improve operations at GG's mines.
Shareholders slammed again
For long-suffering Goldcorp shareholders this is a pretty awful deal, with the main advantage that we are getting rid of the pitiful management that drove GG into the ground (or more fairly the latest management that drove it further into the ground). Since David Garofalo assumed the helm in February 2016, Goldcorp's shares have sunk 26%, compared with a 10% gain for the GDX, miserably failing to make much progress on his own 20/20/20 goals (other than overpaying for "reserves" that won't be produced for many years to come). Having done that, this management chose to sell the company, one of the top five gold miners in the world, within a whisker of a price not seen since January 2002, virtually a 16-year low at a measly 13% premium. A large break-fee inhibits a competitive bid.
Why? Does management think Goldcorp is going to continue its astonishing slide from over $60 a share into oblivion? Or is there something else? For this miserable three-year performance, CEO Garofalo will receive CA$11 million for selling the company, according to the Shareholders' Gold Council. That is on top of being rather overpaid CA$16 million for his first two years (2018 compensation has not yet been disclosed). Other top management will also receive exit pay under change-of-control provisions.
An honest man—honest in the Socratic meaning—would proclaim, "I failed and am giving away this money, which I clearly do not deserve, to charity."
Compensation at top out of control
Garofalo and Goldcorp are by no means alone in overpaying of executives. Peter Kukielski also received a change-of-control payment for his 19 months at Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.MKT) (plus deferred shares, options and performance shares, all on top of a not-ungenerous salary), as did several other Nevsun officers. At least in this case, there was a successful conclusion to his brief time at the company. Others receive large bonuses for simply doing their jobs.
In my view, change-of-control payments should, at minimum, be vested over time, and tied to shareholder returns. Shareholders do not have a vote on these matters. We learn of them only later. Our only recourse, then, is to vote against boards of directors who agree to egregious remunerations. Going forward, I shall suggest such votes.
We are holding Goldcorp in the expectation that the merger with Newmont will go ahead. Holding Newmont will give us exposure to a higher gold price as well as the possibility of better execution at Goldcorp’s mines. How long we hold remains to be seen.
First dividend received at Reservoir
Reservoir Capital Corp. (REO:TSX.V) (0.045 x 0.055) has received its first dividend from the Nigerian hydro company in which it holds an interest, receiving $219,639, validating the transaction that saves the company from almost-certain bankruptcy. Hold for now.
Our return on the recent sale of Nevsun was even better than I said. In the last bulletin, I neglected to include the CA$2 cash that each share of Reservoir received when acquired by Nevsun; how could I forget that? So our total return on this tranche of Nevsun was 128.35%. This brings the average return on all closed positions to 97.7%.
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."[NLINSERT]
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