04/21/2014 03:56 EDT | Updated 06/21/2014 05:59 EDT

Lower gold prices fuelling Barrick's latest merger proposal with Newmont: analysts

Barrick Gold's long courtship with another of North America's largest gold producers is reportedly on the rocks despite the attractiveness of a merger fuelled by lower precious metal prices, industry analysts said Monday.

"It makes sense for it to happen — on paper," said Pawel Rajszel of Veritas Investment Research. "Will it actually happen, it's hard to say. The fact that they've been talking for over two decades now doesn't make me too confident that it will happen."

Still, Rajszel figures that Barrick, the world's largest gold miner by market capitalization, could realize at least $500 million in cost savings by merging with Colorado's Newmont Mining Corp. (NYSE:NEM).

Each company generates 40 to 45 per cent of its cash flow from operating large mining operations in Nevada. A combination could reduce staffing levels, remove large overhead costs and extract better prices from suppliers — synergies that some analysts have valued at as much as $1 billion, twice Rajszel's estimate.

The merged company would be the world's largest gold miner with nearly 11 million ounces of annual production.

Price and disagreement over the assets to combine have reportedly prevented a deal from being consummated in the past. But Rajszel said the timing may now be right — if the two sides can get over the latest snag — because producers are under pressure from thin margins as the price of gold is expected to remain around US$1,300 an ounce for the next couple of years.

"So now that you've got an environment where cost-cutting is the theme of the day — at least from a market perspective, they would be pushed in this direction. When gold prices are going up then nobody cares about costs because everybody's making money," Rajszel said from Toronto.

Barrick shares (TSX:ABX) were down 77 cents or 3.89 per cent at $19.02 Monday afternoon on the Toronto Stock Exchange. In New York, Newmont shares were up $1.46 or 6.2 per cent at US$25 in the face of an anticipated premium from an all-share transaction. Barrick's total market value of C$22.2 billion is nearly twice Newmont's US$12.5 billion, based on Monday's share prices.

News reports from the Wall Street Journal, Bloomberg and others, citing unidentified sources, said on the weekend that the two companies were working towards completing a deal around the time of their respective annual meetings this month.

Toronto-based Barrick has its meeting on April 30, when company founder Peter Munk is set to retire as chairman of the board. Newmont's meeting is scheduled for Wednesday.

Munk's impending departure could prompt a deal to be reached in the coming week, said Rajszel.

"If anything, he would probably want the deal to go through because he thinks this would be more building of his legacy and creating a bigger, stronger company that would have lower costs and therefore be left in better shape."

Analyst Adam Graf, who covers Newmount for Cowen and Company, said the merger would allow the heavily leveraged Barrick, which faces little net growth in the foreseeable future, "renewed strength for survival."

"While we see little shareholder benefit from a merger, it would instantly bulk up production and cash for the struggling senior," he wrote in a report.

Graf said the merger may be Barrick's only option given the high development costs for large-scale assets in its portfolio, including South America's Pascua Lama.

The analyst said the merged company would potentially spin off the combined copper and/or Australian assets, much like Barrick did with its African assets a few years ago.

Rajszel said another option apparently considered was to create a joint venture for the companies' Nevada gold assets.

An industry analyst who asked to remain unnamed said merging the Nevada assets has long been the "most logical" approach.

"It may not be a good thing for the employees of Barrick and Newmount in Nevada obviously because there would be some rationalization and some efficiencies which obviously means layoffs," he said. "But from the perspective of trying to squeeze more free cash flow out of the Nevada assets, putting the two together would make a lot of sense because you could optimize the usage of your various processing facilities."

Reports suggest the spun-off smaller company would be run by Barrick chief executive Jamie Sokalsky. Newmount CEO Gary Goldberg would head the combined larger company while Munk's replacement as chairman, John Thornton, would become executive chairman of the merged company.

A merger would follow the bidding war over Osisko Mining's (TSX:OSK) Quebec Malartic Mine between Goldcorp. Inc. (TSX:G) and a rival friendly offer worth about $3.9 billion from Yamana Gold (TSX:YRI) and Agnico Eagle mines Ltd. (TSX:AEM), both headquartered in Toronto. Goldcorp indicated Monday that it was pulling out of the contest, saying it would not increase its offer which is scheduled to expire on Tuesday.