Why Newmont’s move on Newcrest is opportunistic: Robert Gottliebsen

The bid for Australia’s biggest gold miner undervalues its reserves. Picture: Will Burgess/Bloomberg News.

For the last two decades, US-based gold mining giant Newmont has yearned to take over Australia’s Newcrest.

Suddenly in 2023, Newmont saw its chance and launched an indicative bid, which has been knocked back by Newcrest’s board for now.

And it might have been a smooth exercise, except that Americans have taken Australians to be fools and pitched their early bid at an incredibly low level for long-term gold investors.

As I will detail below, Australian long term shareholders are being asked to sacrifice around half the gold (and copper) backing of their investment.

And the Aussie’s huge gold “donation” to the Denver, Colorado-based company will enable the US company to overcome its long-term gold reserve problem.

I want to emphasise that Newmont is a fine company and I have no problem with Americans acquiring Newcrest.

This is an issue purely about making sure that Australians are not ripped off given the timing of the bid.

It’s true that long-term gold investors award giant gold companies like Newmont what is called the “North American” premium.

Newcrest has a substantial number of long-term shareholders, but many of the institutions who invest in the company follow their traditional short-term investment outlook and are looking for a “quick quid”.

Today’s Newmont board looks back critically at their decision makers of around 1990 who exited most of their interests in Australia after Newmont Australia merged with BHP Gold.

Later, Newmont returned and acquired Normandy Gold and restored the large Boddington mine in WA.

The exit of long-term CEO Sandeep Biswas in October has delivered Newmont an opportunity to seize control. Picture: Colin Murty

But they also watched Newcrest become a remarkable success story as it substantially increased its gold reserves and long-term outlook.

It also developed some of the best gold mining technology in the world.

Newmont made many unofficial approaches to Newcrest looking to reacquire the company.

It was always told in no uncertain terms that if they tried to buy at “give away” prices, which substantially discounted the value of the Newcrest gold, there would be a huge fight.

Newmont strategists have perhaps realised that the best opportunity to convince gullible Australians to donate gold to their ANZUS partner is before 2024.

Newcrest’s giant Lihir gold mine in Papua New Guinea is mining low grade ore until then – a necessary step to reaching the rich high-grade ore that will boost returns after June 30, 2024.

Fortune has also favoured the Americans.

There was a tragic death at a Newcrest mine late in October, and long-term chief executive Sandeep Biswas retired in December. Instead of immediately appointing chief financial officer Sherry Duhe as his permanent replacement, she has been made ‘interim’ CEO.

You can’t fight a takeover battle with an ‘interim CEO’ so Newmont knew now was the time to pounce.

The indicative bid was, of course, a scrip exchange offering shareholders a premium over the market price of Newcrest shares.

But the real value of the bid – gold backing – was so low that it could almost be described as committing a fraud on long-term shareholders.

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 to make matters worse, Newcrest’s cost of extracting its gold is about 15 per cent less than Newmont.

So not only are Australians losing half their gold, it’s going to cost more to extract that reduced gold. Accordingly, long-term shareholders will lose badly, but there is a short term profit.

Such brutal comparisons are rare in most share exchange takeovers because businesses are different, and it’s hard to make a direct comparison.

But in this case, it’s easy and dramatic.

Remember, Newmont is a reputable company, so why would they start at such a low price?

It may be that they were simply opportunistic because for most of the last decade, Newmont gold reserves have declined each year.

The only exception was 2019 when they made a major takeover and I suspect it may have been a mirror image of the Newcrest proposal and reserves were increased substantially before resuming their annual downward decline.

Newmont needs another boost, and what better than for Australians to “donate” gold to help Americans.

It’s not my position to give Newcrest directors advice, but their long-term shareholders need to be helped to avoid this carnage.

Conventional defence advisers are often linked to short-term strategies and rate their achievements in terms of percentage increase in market value.

I’m sure there will be many Newcrest short-term shareholders who will be delighted at this approach, but the board needs to look after long-term investors.

There may be room for some gold dilution, but not 50 per cent.

Newcrest needs a permanent CEO immediately and needs to acquire the skills necessary to promote their long term value. That might require a defence that uses guerrilla-style warfare in all mediums.

Newmont needs to consider seriously whether it wants to make a fair bid or simply try to take long-term Australian shareholders to the cleaners.