How much gold should Australia’s long-term Newcrest shareholders be prepared to “donate” to US gold giant Newmont so short-term Newcrest shareholders can chalk up a handy profit and avoid an immediate fall in Newcrest shares if Newmont withdraws?
The Newmont bid for Newcrest underlines the difficulty many boards face in rationalising the difference between long-term investment strategies and short-term profits
At Newcrest there are two extreme views. The first is that the Newmont initial indicative share exchange bid for Newcrest means that unfortunate Newcrest shareholders are being asked to sacrifice around half the gold (and copper) backing of their investment in exchange for quick profits.
And at the other extreme, some long-term Newcrest shareholders want no gold dilution whatsoever. In other words, the gold reserve backing of any Newmont shares they received in exchange for Newcrest shares would maintain their entitlement to gold reserves.
This would require a much higher bid, which is unlikely to interest Newmont.
However, if Newcrest directors were to recommend any bid that involved anything like a 50 per cent dilution of gold backing for their shareholders it would require a very vigorous investigation by the Foreign Investment Review Board, and perhaps other regulators.
They would need to first check whether it was in the national interest to transfer to US ownership, without proper consideration, so much of our gold wealth. Approval would be unlikely.
And the investigators would also need to thoroughly check whether there was a secret side deal somewhere in the affair that induced directors to act so savagely against the interests of long-term shareholders.
Given there is an immediate market profit available from a successful Newmont bid, an offer pitched somewhere in the middle is probably reasonable – say a 20 to 25 per cent gold backing dilution. If Newmont will not play fair then better the two companies stay apart for the long-term interests of Australians.
Long-term global gold investors award giant gold companies such as Newmont what is called the “North American” premium. The US companies use this premium to acquire companies that sell at a discount to lift the reserves of the US giants. It’s a brutal game.
Using prices at February 3, the day before the Newmont bid, the value of the gold reserves and resources the Americans were offering in exchange for Newcrest gold reserves and resources was about half the worth of the Australian asset.
In simple terms, Newcrest shareholders were halving the value of their gold in the ground and Newcrest’s cost of extracting its gold is about 15 per cent less than Newmont’s.
For many decades the Denver-based US company has needed to make major reserve boosting takeovers using its “North American” premium.
Indeed for most of the past decade, Newmont gold reserves have declined each year, except in 2019, when it made a major takeover.
Newcrest was next on the Newmont reserve boosting list and 2023 was the time to pounce.
Newcrest’s results until around June 2024 are being depressed because, as was planned, Newcrest’s Lihir gold mine in Papua New Guinea is mining through low-grade ore on its way to the rich high-grade ore that will boost returns after June 30, 2024.
Two other events settled the issue.
There was a tragic death at a Newcrest mine in late October, and long-term chief executive Sandeep Biswas retired in December. The board appointed Sherry Duhe as “interim” CEO.
For the past two decades, Newmont has yearned to take over Australia’s Newcrest, which it owned until around 1990 when it exited most of its interests in Australia after Newmont merged its then Australian interests with BHP Gold.
Just over 30 years later, the combination of the PNG situation, the production interruptions following the mine death and the appointment of an interim CEO made Newmont realise this was the time to launch a bid to maximise Newcrest’s “gold donations” to Newmont reserves.
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