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Another Big Mining Merger (Greeted With a Yawn)

01-14-2019

The SPOOs were lower overnight to the tune of 0.5%, and the market opened weaker this morning, but then bounced a bit such that by midday the Nasdaq had lost 0.75%, while the S&P and Dow lost about half that. In the afternoon, the market essentially went sideways until late in the day when it sold off a bit more, as the Nasdaq led the way, losing 1%.

Away from stocks, green paper was mixed, fixed income was weaker, as was oil, and the metals were slightly higher. The miners were mixed and kind of a nonevent.

A New Alloy-ance There was some news, however, in the form of Newmont taking over Goldcorp (or the merger of the two big beasts, depending on how you want to look at it). My initial reaction to this deal is that it is a disappointment. It had appeared as though Goldcorp had been doing the things necessary to turn the company around after the mistakes made by its previous CEO, and that the third quarter was potentially a low point. In fact, the production results the company announced for the fourth quarter did show a 25% improvement and it managed to beat the estimates.

But for Goldcorp to want to do this deal, management must not have felt as strongly as they have about the prospects for their properties and their so-called 20/20/20 plan, because they in effect sold themselves at about $10 and change per share. Over time, the combination may turn out to be a decent investment, but it will be just a big, heavy, generic company similar to Barrick Gold following its merger with Randgold. But whatever potential sizzle that might have been captured by a Goldcorp turnaround is now gone, or at least diluted due to Newmont's size, but as I noted, there must have been something questionable on that front for them to want to do this deal. In any case, it is what it is.

Calling It, For Now I sold my Goldcorp calls because the premium is going to shrink, as whatever good may be in store for Goldcorp will now be amortized over the combined entity, which will not have the potential to move as much as Goldcorp on its own. That is just the math of how these things work, so I decided to book my profits on this particular options trade and see how things develop. That's not to say I wouldn't want to own the stock prospectively, but I want to see what the merged entity is going to look like and let the dust settle before I revisit it.

From an industry standpoint, I think it is not debatable that more consolidation will occur, given what has already transpired. Some deals may make great economic sense, but we will have to look at them case by case.

Positions in stocks mentioned: long ABX calls, long GG.