Barrick out of Newcrest tilt, but Newmont’s bid is still underdone, say analysts

Barrick is out of the running for Newcrest but Newmont will need to sweeten its offer to win support for the Australian gold major.

Operations at Newcrest’s Cadia mine in NSW.

Barrick boss Mark Bristow may have put the gold giant out of the running for Newcrest Mining, but Newmont will still need to improve its offer to win support for the Australian gold major, analysts say.

Mr Bristow told reporters on the sidelines of the Mining Indaba conference in South Africa that the company would not enter the fray for Newcrest, saying “growing bigger for the sake of growing bigger is not a strategy”.

“There is a difference between value merger acquisitions and getting bigger for the sake of getting bigger,” he said.

Newmont shares took a hit on the market on Monday night after news of the proposed transaction went public. The 4.5 per cent price drop on the New York stock exchange took some of the gloss from the all-scrip bid.

When launched, the offer valued Newcrest scrip at $27.16 – a 21 per cent premium to its previous close.

And Australian mining analysts on Tuesday said Newmont’s bid of 0.38 of its own shares for each Newcrest share on offer was unlikely to be seen as a knockout by Newcrest holders.

Citi analyst Kate McCutcheon told clients the emergence of a counter-bid was a possibility, although unlikely, but said the Newmont offer – while a better premium than the 17 per cent paid in Newmont’s 2019 blockbuster merger with Goldcorp – seemed to undervalue Newcrest’s strong growth pipeline.

“We don’t think the offer adequately values Newcrest’s growth options (Red Chris, Wafi-Golpu), copper exposure (of more than 140,000 a year of copper production) and deep-mining (block caving) expertise – all three of which are differentiated versus peers,” she said.

Newmont already operates the Boddington and Tanami gold mines in Australia, as well as two gold mines in Ghana, six in North America and four in South America. Together, the group is expected to produce about 6 million ounces of gold in 2022.

Newcrest’s mines in Australia, Canada and Papua New Guinea are expected to produce about 2.2 million ounces of gold in the current financial year.

On top of that, Newmont would acquire Newcrest’s project pipeline, including a major underground expansion of its Red Chris mine in Canada through a block cave mine, the potential expansion of Telfer through the nearby Havieron deposit, the long-stalled Wafi-Golpu project in PNG, and Newcrest’s strong options in Ecuador including its stake in troubled explorer SolGold and its relationship with Canada’s Lundin Gold.

“We think either the offer gets bumped or NCM continues on its capex-intensive but rewarding growth path alone,” Ms McCutcheon said in a client note.

Newcrest shares closed up again on Tuesday, drifting 42c higher, or 1.7 per cent, at $24.95 – still well below the implied Newmont valuation, suggesting the market is taking a cautious approach to the likely completion of any deal.

Morningstar analyst Jon Mills said the decision of the Newcrest board to consider the Newmont offer indicated that the company was now in play, but also believed the offer undervalued Newcrest.

“We also think Newmont is taking advantage of a strong US dollar, while gold miners generally remain out of favour given investor concerns over rising interest rates, which increase the opportunity cost of holding gold given it doesn’t generate any cash flow for investors,” he said on Tuesday.

“Operating costs are also rising due to inflation, squeezing margins. However, if inflation continues, we expect the long-term gold price will likely need to be higher to maintain gold production and ensure reasonable returns for miners.”

Newcrest shares hit a long-term low of $15.72 in September, having traded above $35 a share in mid-2019 amid the first wave of megamergers in the global gold sector. Its shares only climbed back above $20 in early December, with Newmont said to have made its first offer for the company – initially rejected by its board – in January.

“We think the attraction of Newcrest to Newmont is its long-life Lihir and Cadia mines in Papua New Guinea and Australia, respectively, along with its substantial development pipeline including Havieron, Red Chris, and Wafi-Golpu in Papua New Guinea,” Mr Mills said in a research note.

“In our view Newmont is trying to acquire reserve and resource life at a time when we think Newcrest is cheap.”

Originally published as Barrick out of Newcrest tilt, but Newmont’s bid is still underdone, say analysts