Newmont Corporation’s latest (best and final) offer to acquire Newcrest Mining has a reasonable chance of success, in our view. If accepted, NCM shareholders will own approximately 31% of the much larger Newmont business.
Acquiring NCM for A$29.4bn would extend NEM’s lead as the largest gold producer in the world and its annual gold production would be nearly double its nearest rival, Barrick Gold. In FY22, NEM produced 6Moz of gold and a further 1.3m gold equivalent ounces from copper, silver, lead and zinc at an AISC (all-in-sustaining-cost) of US$1,211 per oz. In the year to June 2022, NCM produced 1.95Moz of gold, 121kt of copper and ~1Moz of silver.
Newmont's Prize?
NCM has three key assets. Cadia (NSW) has 18Moz of gold ore reserves and 3.7Mt of copper indicating a gold reserve life of more than 30 years. In FY22, Cadia produced 561koz of gold and 85kt of copper. On-going planned expansions of the block-caving project underpin the growth of Cadia well into the future.
Lihir in PNG was acquired by NCM in 2010 and has ore reserves of 22Moz of gold. In FY22, Lihir produced 687koz of gold and has a reserve life of more than 20 years.
The Telfer project in the Paterson province in WA is operated by NCM under a JV with Greatland Gold plc. In FY22, Telfer produced 408koz of gold and 14kt of copper. Telfer owns 70% of the adjacent Havieron project which will provide NCM with development options into the future.
Also in the portfolio is a 70% interest in the Red Chris project located in Canada. This project has ore reserves of 8.0Moz of gold and 2.1mt of copper. AN expansion project is underway to improve on the 42koz gold production from FY22.
In 2022, NCM acquired Pretium in Canada which contains the Brucejack project, about 140km away from Red Chris. Brucejack is one of the highest grade operating mines in the world and added 114koz over 4 months of ownership to NCM’s FY22 total. NCM is expecting Brucejack to produce 320-370koz of gold in FY23f.
NCM has a 32% interest in Toronto-listed Lundin Gold which is the owner of the Fruta del Norte mine in Ecuador. The current market value of the stake is C$1.3bn. NCM also has a 13.5% stake in SolGold, a London-listed entity worth approximately US$100m.
As at 30 June 2022, NCM group ore reserves were: 61Moz of contained gold, 11mt of copper, 29Moz of silver and 0.1Mt of Molybdenum. The ore reserves include 11Moz of gold and 4.9Mt of copper for the yet to be developed Wafi-Golpu project in PNG.
Is Newmont's Offer Enough?
NEM’s revised offer of 0.40 NEM shares for each NCM share, plus a fully franked US110cps special dividend to NCM shareholders. The implied value, including the fully franked special dividend plus a final ordinary dividend, would give shareholders perhaps 10% upside from the current share price.
The implied value of the NEM offer represents ~30% premium to the consensus target price before NEM receiving interest. In our view, the price is fair, but not a complete knockout offer with reference to historical valuation premiums paid in the gold sector.
To date, the NCM Board in our view has done very little to try and extract a higher price from NEM. There has been nothing on improved production, lower costs, or higher reserves/resources. The Board’s lack of action is in complete contrast to the action of the Origin Energy (ORG) board with their M&A approach in recent months. Outside of a competing offer, which we see as highly unlikely, the current NEM offer is as good as it gets for NCM shareholders.
Investment View
NCM is currently without a permanent CEO and its Board has not openly treated NEM as hostile. Notwithstanding the Board’s final recommendation, once NEM has done its homework, this looks like shareholders are now faced with the simple option of either accepting the scrip bid and becoming NEM shareholders or selling.
If the NEM takeover is successful, there may be a secondary CDI listing on the ASX which would allow Australian shareholders to conveniently trade their stock.
Risks to Investment View
The NEM offer may not move to a binding proposal after due diligence. If not, NCM would remain a listed Australian gold mining company with a strong portfolio and growth prospects.
If weak global economic growth is avoided, the gold price may retrace its recent growth.
If the NEM takeover is successful, shareholders will be exposed to the risks of that company which has a greater North American exposure and a broader global exposure than NCM.
Recommendation
We have initiated our coverage with a Hold recommendation while the offer from Newmont Corporation remains live.
Figure 1: NCM ASSETS (NOTE: WAFI-GOLPU NOT PRODUCING YET)
