Is Newmont buying production ounces, or buying future growth? That is one of the big questions for the Newcrest Mining board as it considers whether to try to force another bump in Newmont’s offer for the Australian gold major.
There’s no doubt Newcrest’s mines have underperformed in recent years, and its growth projects – at Telfer, through the Havieron discovery; in Canada, through its acquisition of Red Chris; at the long-stalled Wafi-Golpu project in PNG, and through its options in Ecuador – will take years of investment before delivering any meaningful cash returns.
Newmont has an enviable reputation as an operator. It claims to have realised more than $US700m in synergies and improvements after its blockbuster acquisition of Gold Corp in 2019.
But on that basis alone, it’s hard to see Newmont adding too much to its bid for a set of assets that – while quality and long-life – are also past their prime, particularly given Newmont is already paying a premium to acquire mines in the tier-one jurisdictions of Australia and Canada.
A rival bid could change that equation, but it’s difficult to see Barrick making a bid for any other reason than sheer hubris – Barrick is still smarting from its temporary ejection from Porgera in PNG, and acquiring more assets there would be a major complication for even Mark Bristow. Agnico Eagle is the other bidder with the size and scale – but the company has moved far and fast recently and still has plenty to digest from its recent acquisition of Yamana Gold.
Far more intriguing is the possibility that Newcrest could instead move on another miner to build the scale to rival the global top three – such as South Africa’s $US9.6bn rated Gold Fields, also looking for a CEO, and which also has a substantial base in Australia.
But if Newmont is buying growth, shareholders have a greater prospect of winning a bump in the price – that was, in the end, the winning argument for OZ Minerals in forcing a better bid from BHP. And there is a parallel between the two mining takeovers that is worth noting. As deposits get harder to find and exploit – and deeper underground – mining methods need to change.
Like OZ, Newcrest is one of only a handful of companies with experience in block cave mining – undermining an orebody to make it collapse under its own weight. Block caves allow bulk mining at deep and low-grade deposits, opening up a new front for global majors. It is the key to the expansion of Rio Tinto’s Oyu Tolgoi mine. Newcrest does it at Cadia, and plans to do so at Red Chris. OZ just hit a milestone at its Carrapateena block cave. Aside from Chile’s Codelco, few other companies possess the skills to make one work. Newmont does not.
Obviously you don’t drop $25bn on the table to get access to a team of people that can build and run a block cave operation. But the skill set required to do so has value – something the Newcrest board will consider as they weigh Newmont’s bid.
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