Barrick-Newmont merger could be as good as gold

There was a time when owning a gold mine was … well, as good as owning a gold mine. But these days bullion companies are struggling to make their business profitable, as the cost of extracting the precious metal keeps rising, while gold itself continues to trade on the low end.

However not everyone believes reported “cash costs” really reflect gold miners’ cash flow.

One reason for the suspicion, WSJ reports, is that the indicator excludes everything from exploration and capital expenditure costs to overhead and other expenses that make up the day-to-day costs of running a mining business.

In a note to clients Monday, UBS estimated that industry wide cash costs for gold averaged $728 per ounce in the fourth quarter. With gold prices averaging about $1,271 per ounce in the quarter, that implies a margin of $543. Not bad, right?

But when UBS digs deeper, it finds the all-in cost was a much loftier $1,205, resulting in a much slimmer margin of $67 per ounce.

Lean profits and cost savings were, in fact, at the centre of Canada’s Barrick Gold (TSE, NYSE:ABX) and US-based Newmont’s (NYSE:NEM) recent $33 billion merger talks, which will likely resume after US-based miner's annual general meeting today, sources say.

The fusion of both companies makes sense for many reasons other than cost savings. They have complementary mines in Nevada, which is the core-operating region for both of them. Combining them would unlock hundreds of millions of dollars in synergies.

Another key factor is that both companies have new executives, who seem to have a different view about their companies’ future than their predecessors. On Barrick’s side, John Thornton is replacing Peter Munk as chairman this month, and Jamie Sokalsky has only been chief executive since 2012. And Gary Goldberg has been at the helm of Newmont only since March 2013.

If a merger of the two world’s largest gold miners come true, the new gold giant would have operations on five continents, with a gold output of well over 12 million ounces a year.

Perhaps then owning a gold mine will be just like in the old days.