In gold mega deals, size really does matter

There’s a familiar theme behind Newmont Corp’s $24.5 billion takeover approach to Newcrest Mining. At the big end of the gold sector, size really does matter.

It is a theme that has played out in several bouts of consolidation at the big end of the gold sector, most recently in 2018-19, when Barrick Gold acquired South Africa’s Randgold and then Newmont gate-crashed merger discussions between Newcrest and Canada’s Goldcorp with a successful $US10 billion offer.

A decade and a half earlier, Newmont had acquired Australia’s Normandy Mining and Canada’s Franco-Nevada and Barrick Canada’s Placer Dome.

The rationale each time has been the same.

At the big end of the gold sector, size really does matter.Credit: Getty

The biggest of the gold miners are awarded a sharemarket premium for size, and the North American miners get an additional sliver for their domicile. Hence, the pursuit of simple scale by the dominant gold groups, their capacity to make attractive offers in any acquisition and their use of scrip, rather than cash, to fund their acquisitions.

Newmont’s latest overture to Newcrest – an offer of 0.38 of its shares for each Newcrest share that’s worth about $27.40 a share, or a premium of 22 per cent over Newcrest’s closing share price on Friday – also points to another idiosyncrasy of gold miners.

Gold isn’t just a metal, but a financial asset, and gold companies generally trade above the net present value of their future cash flows because there is an option value in the gold price beyond the intrinsic value of the companies’ reserves.

That, along with the premium for size and domicile, is another key reason why acquisitions in the sector have been, as the Newmont approach to Newcrest is, scrip-based.

It also explains why it only makes financial sense for one of the big gold miners to mount an offer for one of its peers. No-one other than the big North American gold miners could make sense of the economics of a bid with a takeover premium, albeit a relatively modest one, for Newcrest.

It is inevitable that Newmont, Barrick and Canada’s Agnico Eagle would have run the numbers on Newcrest over the years.

Newcrest is a low-cost producer with long-life reserves in a sector where few new large orebodies have been discovered, where those that have tend to be gold/copper rather than pure gold orebodies and where the costs of existing mines have been rising and grades have been falling.

(Copper might be much sought after in an era of electrification but, while it might have been “financialised” in recent decades, it isn’t a financial asset with the option value of gold.)

Newcrest has particular appeal to Newmont, which has its own large operations in Australia (Boddington in Western Australia and Tanami in the Northern Territory).

Barrick doesn’t have material operations in Australia but does have the mothballed Porgera mine in Papua New Guinea. Porgera has been on care and maintenance since 2020 after the PNG government declined to renew the mining lease, but Barrick hopes to re-start it. Newcrest has its big Lihir mine in PNG and is developing the Wafi-Golpu project with South Africa’s Harmony Gold.

The move on Newcrest has been neatly timed, given that the company is currently without a chief executive after Sandeep Biswas abruptly departed in December. But the timing also reflects a change in the external settings and gold companies’ share prices.

Well-timed offer

Last year, as the US Federal Reserve Board led a global tightening of monetary policies with its succession of aggressive interest rate rises, the US dollar strengthened significantly and the gold price slumped.

There is a broadly inverse relationship between the US dollar and the gold price, which is itself denominated in US dollars and therefore becomes more expensive in third currencies as the US dollar appreciates. Gold also doesn’t generate a yield, but involves holding costs. As yields on bonds rose last year, the appeal of gold diminished.

Between March last year, when the Fed began hiking US rates, and early November, the gold price fell from just over $US2000 an ounce to about $US1630 an ounce. Then it started to surge and is now trading around $US1880 an ounce.

That rebound occurred as the US dollar, which had appreciated nearly 20 per cent against the trade-weighted basket of America’s major trading partners, began to slide. It has weakened almost 9 per cent since early November as the US bond market began to price in an end to the Fed’s rate-hiking cycle in the second half of this year.

The share prices of the major gold companies reflect those changes in the pricing of gold.

Newmont’s share price fell from just above $US85 in April last year to a low of around $US37.80 before recovering some of the lost ground. It now trades at just under $US50 a share. Newcrest’s price fell from almost $29 to below $16 before recovering to the A22.45 it was trading at before the Australian Financial Review’s Street Talk column broke the news of the Newmont approach.

Assuming the dollar doesn’t rebound (which also assumes that US rates are nearing their peak) and sharemarkets remain stable, gold company share prices are likely to continue to recover as the higher gold prices feed into the economics of the miners’ operations.

Grabbing Newcrest, line-ball with AngloGold Ashanti as the biggest of the non-North American miners, at this point in the industry’s cycle and adding the North American premium to its numbers would appear quite an astute move.

It is, of course, dependent on Newcrest co-operating with an offer that – because it is all-scrip and structured as a scheme of arrangement – requires the support of the Newcrest board.

The board, while disclosing that Newmont had improved the terms of the share swap from an initial ratio of 0.363 Newmont shares for each Newcrest share (worth about $26 a share) that the directors had rejected, haven’t yet endorsed the offer now on the table.

Given the value the acquisition could create for Newmont’s shareholders if Newcrest’s production and income attract the premia for scale and North American domicile, there might be another round, or two, of negotiations to come.

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