Newcrest eyes cashflow boost from Fruta del Norte revenue
Newcrest expects to see a significant lift in cashflow from the Fruta del Norte revenue streams it is paying $US460m for.
Newcrest Mining boss Sandeep Biswas says the company is investing for growth amid the soaring gold price, setting its sights on funding new projects with the proceeds of this week’s $1bn capital raising, as well as acquiring a major new revenue stream.
Newcrest launched a $1bn capital raising on Thursday at $25.60 to fund the acquisition of a royalty stream from Lundin Gold’s Fruta del Norte gold project in Ecuador, and to fund early work on its own growth projects.
Australia’s biggest gold miner said it will spend $US460m ($703m) on a royalty stream worth 34 per cent of Fruta del Norte’s free cash flow over the next five years, including a 218,500oz gold pre-pay facility and streaming facility worth 7.75 per cent of refined gold processed each month, multiplied by the excess of the spot gold price over $US400/oz, until 350,000oz is reached.
Mr Biswas said the investment offers a strong 11 per cent return on Newcrest’s investments if the gold price stays up, and the acquisition strengthens Newcrest’s interest in Lundin and Fruta del Norte.
Newcrest already owns a 32 per cent stake in Lundin itself, having first bought into the company in early 2018 in a $US250m deal to acquire 27 per cent of its stock. It topped up its holding in late 2019.
Fruta del Norte is temporarily closed amid the coronavirus crisis, but Canada’s Lundin declared in February the mine had achieved commercial production.
Mr Biswas said the acquisition is expected to provide Newcrest with exposure to approximately 400,000 ounces of gold from the mine between 2020 and 2026.
“The purchase of these gold prepay and stream facilities and the offtake agreement increases our direct exposure to the cash flow generated by the Tier 1 Fruta del Norte mine, in line with our stated growth strategy,” he said.
“With gold prices at the levels we see today, Newcrest expects to receive significant cash flows which will rank ahead of Lundin Gold’s equity holders.”
Although the default provisions under the streaming arrangements Newcrest has acquired could allow the gold major to step in to enforce its rights if the mine remains closed until June 20, 90 days after it was closed by Ecuador’s government over the coronavirus crisis, Mr Biswas said Newcrest’s relationship with Lundin was strong, with the company already having lent its investee staff and expertise to aid in the mine’s development.
“We’ve been watching the asset for many years. In terms of this facility we were in discussion on this, because it was a competitive process, long before the COVID-19 came up,” he said.
“It’s not opportunistic, it’s strategic.”
But Mr Biswas played down the likelihood Newcrest would seek to move to a full takeover of Lundin, saying the company was “very happy” with its current position.
“This is about the facilities -- this is not something we’d normally do in an asset we don’t have a big share in, but because of that we see it as very complementary to our equity investment,” he said.
Newcrest said it will use the remainder of the cash to fund early works at its emerging Havieron discovery in Western Australia, near its Telfer mine, and for expansion work at its Red Chris operations.
The company said on Thursday it is likely to release a first mineral resource estimate at Havieron within the next quarter, and hopes to finalise plans to drive an initial decline down to the underground deposit by the end of the year.
The gold major also released its quarterly production report on Thursday, saying group gold production of 519,000oz was in line with previous guidance, although 6 per cent lower than the December quarter on the back of planned shutdowns at its Cadia and Telfer operations.
Newcrest will place $1bn worth of stock to institutional investors as part of is capital raising, and will run a $100m share purchase plan at the same price to allow existing retail holders to top up their position.
Newcrest shares last traded at $27.54.
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