Why Newmont’s bid for Newcrest is a classic gold play in a world of paper

The move by the world’s biggest gold group Newmont to buy Australia’s biggest gold miner Newcrest is an old-fashioned corporate merger wrapped up in the complex fast-moving dynamics of the 21st century.

What dynamics exactly?

Well, think Bitcoin and the other pseudo-gold cryptocurrencies.

Think US government debt topping $US31 trillion – close to $45 trillion in our down under dollars – and growing. Then add on all the other paper-money government debts of almost every country, including our heading-for $1 trillion contribution. Put it that way, and it’s barely worth mentioning; like our CO2 emissions. This ever-spiralling debt came from governments routinely spending more than they raised in taxation, plus two super-spurts when they and central banks printed trillions after the GFC insanity, and then did it again through the Covid hysteria.

And that – who knows the real global figure: the IMF said it was around $US92 trillion in 2021? – is only, to stress, government debt. Think about the even bigger sums of private sector debt – businesses and households – taking the total global figure to somewhere north of $US300 trillion.

Again, who knows the exact amount, within, say, $US20 trillion: you want to tell me anyone knows the real Chinese number? All paper, paper and yet more paper, albeit now mostly in digital form, here, there and everywhere.

Any wonder that gold is still rather popular: as a store of value; as the eternal protection against your, and everyone else’s, government debasing the currency or confiscating it? Bitcoin and the others offer the allure of adding more pseudo-gold supply; with the added convenience of doing it in the 24/7 global accessibility of the digital space; and with the added purported advantage of transactional privacy. With all of this, real and pseudo gold, still denominated in US dollars – the currency of a now very different country to the one that exited the 20th century.

Fast forward to the world of 2023: the current dynamic of rising interest rates and the – very, very marginal – un-printing of all that central bank money-printing. This should be relatively negative for gold prices, real and pseudo: they generate no income yield but have a rising-yield holding cost. And for gold companies. It certainly was, in the short-term through 2022, albeit with the added complication of being expressed in a fluctuating and, through 2022, a generally rising US dollar on those Fed rate hikes. It should also have been negative for the share prices of gold companies, and it was. Newmont halved from $US85 to $US42; Newcrest went from $28 to $17.

Although interestingly – and importantly for any merger terms – Newcrest’s share price had already been sliding, pretty consistently from a peak of $37 in 2019 just before Covid. Again, in its own peculiar context of being an Australian-dollar based company, with an Australian dollar share price, operating in a US dollar gold price world. Newmont’s offer had to be paper and not (ironically, paper) cash money. Both from Newmont’s perspective as buyer and to be sufficiently attractive to Newcrest holders. In real terms, it’s not so much the derived ‘value’ of the offer as at today’s Newmont share price.

But what share Newcrest holders get, as a group and per share, in the merged entity going forward. Indeed, Newcrest holders really have to be offered a bigger slice than just their pro-rata core entitlement, plus that share of the synergistic upside of putting the two companies together. Newmont started with 0.363 of one of its share for each Newcrest share. That was roundly rejected by Newcrest. Now it’s offered an extra 5 per cent – 0.38 of a share. Straight up, it’s hard to see how that could be endorsed. This is made even more emphatic when you factor the much bigger fall in the Newcrest share price since mid-2019.