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HomeBusinessWhy Newmont (and probably Barrick) wants Newcrest

Why Newmont (and probably Barrick) wants Newcrest

Shares in ASX-listed Newcrest (ASX:NCM) closed more than 9% higher on Monday after the world’s biggest gold miner, Newmont Corporation launched a bid over the weekend to buy all of Newcrest’s shares at a 22% premium to its previous closing price.

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The offer, valuing the company at nearly $US17 billion ($24.5 billion), would entitle Newcrest shareholders to receive 0.38 Newmont shares for each Newcrest share they own, the companies said.

Newcrest told the ASX that the offer was the second non-binding takeover proposal it had received from Newmont following an earlier bid at an exchange ratio of 0.363 Newmont shares for each Newcrest share.

Newcrest told shareholders to sit and don’t do anything and hedge funds and punters chased the shares up to a day’s high of $25.68. (The theoretical value of the offer is more than $US27 per Newcrest share).

It is widely believed there’s every chance Barrick, the world’s second biggest miner and an off-and-on bidder for Newmont, will look to join the bidding war.

For Australian investors in Newcrest the big question is why should they exchange shares in Newcrest for Newmont (or Barrick et al) paper?

Australian investors would sell the Newmont shares and buy something a bit more reliable. OZ Minerals has gone to BHP, so the likes of IGO, Evolution and Northern Star could be targets.

Other major gold bids – except for the Canadian mega-merger of equals between Agnico Eagle and Lakeland in 2021 and 2022 – have failed in the past six years or so when they have just been paper based.

It’s cheaper to buy production than to spend cash to develop it at the moment thanks to the explosion in mining and development costs in the past year or so.

Energy costs are much higher, labour costs are as well – and there are continuing shortages, cement, concrete, steel, grinding materials, technology all cost more than they did in 2019 and 2020.

International investment is a bit more problematic – Newmont and Barrick, the world’s first and second biggest gold miners, have major projects in some difficult areas.

Newmont last year announced it will delay the full-funds investment decision for the Yanacocha Sulfides project in Peru to the second half of 2024. Political and mining conditions in Peru have worsened since then with foreign mining companies on the nose.

Barrick has the massive Reko Diq copper- gold project planned in Pakistan for operation in five or six years’ time. It is one of the world’s major undeveloped deposits and yet it is based in the Pakistani province of Balochistan which is becoming increasingly unstable with the Taliban and other extremist groups are growing threat.

It’s no wonder Newmont, the world’s biggest miner, wants Newcrest. Same goes for #2 Barrick.

Both are facing growing pressures to halt the slide in their gold production over the last three years and do something about finding sources of new ounces or mines.

Buying a rival big miner is the easiest way and Newcrest is top of the list because its $3.7 billion offer for Canadian miner Pretium gave it control of the Brucejack mine in British Colombia, one of the richest mines in the world (and one of the newest).

The world’s top 10 gold miners have seen some action recently.

The Agnico Eagle merger with Kirkland Lake gave it control of the rich Fosterville underground gold mine in central Victoria, as well as mines in Canada. That was an all-share deal

Then Goldfields tried to buy Yamana Gold and was rejected. Goldfields then lost its CEO. That was an all-share deal as well but lost a third of its value with investors selling Goldfields shares as the gold price fell and doubt increased about the management of the merged company.

That left Yamana Gold vulnerable and it was then quickly snapped up by Agnico Eagle and Pan American Silver Corp. Agnico took the Canadian and other gold operations, Pan American took the rest.

That was a cash and shares offer for Agnico Eagle contributing $US1 billion in cash of the $US4.8 billion value of the successful deal

Back in 2017 and 2019 Barrick tried to buy Newmont and the two then settled their arguments by joint venturing their Nevada Gold Mines. Barrick launched an all share bid for Newmont which went nowhere.

Newmont’s biggest problem is the loss of momentum in gold production – output peaked in 2019 at more than 6.3 million ounces (there’s also copper, silver and cobalt produced as well). Output in 2020 was 5.824 million ounces and 5.884 million in 2021.

Newmont is due to release its 2022 result and production and exploration reports on February 23.

Newmont forecast output of around 6.6 million for 2021 at one stage but Covid, labour shortages and wet weather restricted output at its Tanami mine in the Northern Territory and at its huge Boddington mine near Perth.

The problems started with Boddington in late 2021 and then continued into 2022 forcing another cut to guidance because of the Covid problems at Tanami and then in Canada and other mines.

Rival Barrick has had worse problems – despite an improvement in the December quarter, its 2022 gold production was at a 22 year low.

Barrick produced 4.14 million ounces of gold in 2022, the third straight decline in annual output, according to the company’s preliminary report for 2022 released in mid-January.

That weak performance and the chances of fixing it via a bid won’t worry Barrick and its aggressive CEO Mark Bristow.

By spending $3.7 billion on Pretium, Newcrest added the rich Brucejack mine to its Red Chris operations, also in British Columbia (BC), making Newcrest the largest gold miner in the province.

Newcrest also owns the Lihir mine in PNG, the rich Cadia gold-copper mine in Central Western NSW which is now in the midst of a major expansion, the Telfer mine in the Patterson region of Eastern WA (it was the foundation mine of the company and its predecessor, BHP Gold), as well as a 70% stake in the emerging Havieron gold copper mine 45 km from Telfer.

Newcrest is completing work at Telfer to extend its life so as to give Newcrest and its co-owner at Havieron, Greatland Gold of London) the time to decide on a massive investment on the actual mine (an exploration and development drive has been driven more than a kilometre underground at Havieron, with other preliminary works done at the site).

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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