CA - Newcrest Mining: Bidding War For Aussie Gold Miner On The Cards

Summary

• Newcrest Mining is a US $17B gold miner with a diverse set of quality assets in Australia, the Americas and the Asia Pacific.
• The firm was the subject of an all-share takeover offer by American giant Newmont Mining.
• The combined merger would make it the world's largest gold miner.
• But an all-stock offering likely undervalues the company's intrinsic value.

General Overview

With geo-political volatility and inflation on the up, it's hard to shun gold. The precious yellow metal has been on the rise of late, perhaps inspiring consolidation of gold miners while firms jostle to secure first dibs at the world’s most lucrative gold projects. It’s the case for Newcrest Mining ( NCMGF ) – the Australian gold miner recently receiving an all-share offer from US giant Newmont Mining (NEM).

Consequently, it is hard not to be bullish on the firm’s outlook. Despite a balanced portfolio of assets, solid cash flows, and corporate expansion, some of the underlying issues with the deal appear concealed.

An absence of corporate leadership married with an all-share proposal may be an opportunistic play for Cadia, among other assets, rather than a genuine opportunity for equity holders. I remain bullish on Newcrest Mining but unconvinced as to whether Newmont Mining’s corporate courting of the Australian player represents lasting shareholder value.

Gold prices have accelerated from November lows over the past 12 months.

Company Introduction

Newcrest Mining is a US $15B Australian gold miner, engaging in exploration, development, operations, marketing & sales of gold & gold/ copper concentrates. It focuses on gold plays with long-reserve life, low-cost production, and robust project financials, that provide profitable cash generation.

The company prides itself on its healthy balance sheet, coupled with technical expertise and a project portfolio spanning Australia, North America, Latin America, and Asia Pacific. The company has continued to shape its portfolio over the past 5 years with strategic divestments and development of select tier 1 assets.

Newcrest Mining has made inroads into developing quality assets over the past 5 years while divesting non-strategic holdings.

Newcrest has progressed its strategic growth targets with investments in Brucejack (Canada), Cadia (Australia), Lihir (Papua New Guinea), Red Chris (Canada) and Havieron (Australia). The mining outfit features an exemplary safety record, particularly for high-risk underground mining operations, with 7 years fatality free.

Additional efforts have been earmarked for cost mitigation strategies to counter inflationary pressures seeping into operating costs. These include fixed pricing agreements with vendors, hedging contracts for Lihir fuel costs, and contract caps for different spend categories. Cadia (Australia) and Lihir (Papua New Guinea) will make up the lion’s share of capital expenditure in 2023 as the business looks to boost output of its premier assets.

Newcrest boasts a solid pipeline of organic growth projects with multiple feasibility studies focusing on Tier 1 metal districts in Australasia and the Americas. The company’s increasing exposure to copper developments offers a natural hedge, diversification benefits and complements expected growth in gold production.

The company’s gold portfolio benefits from the asset’s safe-haven characteristics, and inflationary hedging attributes while copper is increasingly becoming a critical metal in decarbonization. Additionally, copper use is more heavily linked to industrial production than gold.

Project Portfolio

Cadia, a New South Wales, Australia gold play, is a low-cost, long-life asset currently under expansion. Recent improvements have been made to processing equipment, such as replacement of the SAG mill motor and developments made to underground ventilation. The project remains the crown jewel in Newcrest’s project portfolio with huge reserves (18M oz gold probable ore reserves/ 3.7Mt copper) and rock bottom operating costs.

Lihir Island continues to see prudent investment in capital equipment and processing facilities unlocking additional high-grade reserves.

Lihir, a prolific gold play on a remote Papua New Guinean Island, is also receiving extra development dollars. Newcrest’s mining improvement program has seen the arrival of two ultra-size heavy duty mining shovels aimed at moving big cubes, while a vast truck rebuild project is positively impacting haulage rates. Higher grade ore sources are expected in the medium term due to progress with feasibility studies for Phase 14A and production stripping at Phases 16 & 17.

Brucejack, the miner’s new underground Canadian development, is expected to see synergies increase through the identification of further development opportunities. Ongoing vendor negotiations are expected to bring an additional C $20M-$30M of savings and a full transition to battery electric haulage is penned in for FY 2023. Further improvements on mill output are also currently being worked on.

Newcrest’s pioneering Latin American partnerships provide additional growth opportunities outside its traditional home of Australia.

Newcrest is prudently investing in a Latin American partnership with Lundin Gold (LUGDF). The company’s equity interest in Fruta Del Norte (32%) and SolGold (SLGGF) (13.5%) provide the corporation with exposure to vastly under-explored gold jurisdictions in Ecuador and the Andean Copper Belt.

Takeover Offer from Newmont

News of a takeover deal surfaced Sunday 5 February when Newmont Mining, the US based gold mining giant, pitched an all-share offer to acquire Newcrest, valuing the Australian firm at $17B. The deal would see Newcrest shareholders receive 0.38 Newmont shares for every Newcrest share held. The Denver, Colorado based mining behemoth is already among the world’s largest producers by volumes and market capitalization.

With a corporate marriage on the cards, this could well see the combined venture producing almost twice as much as closest rival Barrick Gold. While the opening pitch appears not to have moved the M&A Richter scale, the American firm may consider marginally bettering its US $17B all-share deal for Newcrest amid concerns of a low-ball offer.

The departure of Newcrest CEO Sandeep Biswas last December has put the Australian target company in a state of flux as it scrambles to appraise the deal’s merits while preparing half yearly results. Newcrest’s board of directors seems contented to buy time before engaging meaningful discussions with institutional shareholders on a path forward. Australian fund managers are generally keen to see a deal pushed through as Newcrest shares have generally underperformed other gold peers such as Newmont, Agnico Eagle (AEM), and Barrick Gold (GOLD).

Elsewhere, an all-share pitch perhaps indicates Newmont top management thinks its equity is overvalued. If Newmont’s board thought the US company’s equity was undervalued, it would be aggressively pushing an all-cash deal. Newmont equity did slide following the announcement, playing nicely into the hands of merger arbitrage funds. Bank of America & Lazard are advising Newmont on its pitch while JP Morgan and Gresham are assisting Newcrest.

The combined group would have 70% of assets in North America & Australia.

Australia’s prolific Cadia gold-play would continue to dominate the project portfolio.

Financials

Prudent financial management coupled with a rock-solid balance sheet provide possibly some insight into why Newmont Mining has made a pitch for Newcrest. The Australian miner has kept its debt in check, with an investment grade credit rating of BBB and Baa2 while financial policy targets have helped keep leverage (0.6x) under control.

Long dated debt has been cautiously managed and the company posts $565M of cash on tap with an additional $110M in marketable securities. The company’s organic expansion has been funded from operating cash flows and existing debt facilities, helping the Australian miner navigate a high cost of capital environment.

Revenues have receded more recently ($4.2B FY 2022) after a +16% increase from FY 2020 ($3.9B) to FY 2021 ($4.5B) Expect to see a buoyant price environment for gold reflect positively on near term sales. EBITDA margins – that provide a plausible yardstick while discounting tax considerations and capital structure choices – have remained at ~45% over the past couple of years.

The company does hold roughly $700M in goodwill on its balance sheet – the premium paid above the fair value of an asset during its acquisition - something investors need to be wary of as any future impairment will have a net impact on equity. A growing deferred tax liability (FY 2021 - $1.3B to FY 2022 - $2.2B) needs further scrutineering for anyone looking to deploy capital.

Cash flows from operations have tapered from a record $2.3B posted in FY 2021. FY 2022 operations cash flows were strong during the back end of the year but still moderated towards the $1.7B mark. Expect this number to improve in 2023 as the firm benefits from a hawkish gold price environment.

The company continues to deploy capital ($2.5B in FY 2022) as it continues to grow strategic assets. Debt is being selectively repaid and rolled over ($860M issued in FY 2022 with $900M in old debt being repaid). The company continues to support its share price with stock buybacks ($14M in FY 2022) and paid $372M in dividends FY 2022. The company has a dividend yield of 1.44% on a payout ratio of 42%. Newcrest presently trades at 21x forward earnings – a similar rate to its bidder, Newmont.

Risk

Newcrest remains heavily exposed to gold. Despite recent efforts to branch out to copper, the company’s fortunes remain espoused to the precious yellow metal. US monetary policy and an outlook on interest rates, along with geo-political volatility (or lack thereof) are likely to directly impact gold’s fortunes and therefore Newcrest revenues.

The company operates in relatively easy jurisdictions, save perhaps Papua New Guinea so premiums linked to geo-political risk may not be relevant here. The company is expanding its gold assets but is achieving this through operating cash flows or secured credit lines – that means credit risk is less of a factor also.

As mentioned earlier, the company is a takeover target for Newmont Mining – while that deal may fall through, the company portfolio of assets could appeal to another suitor, conceivably triggering a bidding war. It is worth noting that following the departure of its last CEO, the company is on the hunt for new leadership and strategic renewal. Any corporate asset grab for the firm by a competitor could be perceived as being opportunistic.

Key Takeaways

Newcrest mining is an appealing Australian gold miner with a diverse product portfolio, stable balance sheet, and cash generative assets that has caught the eye of gold-mining giant Newmont Mining. The company has managed to somewhat de-risk operations by developing projects throughout the Americas, Australasia, and the Asia Pacific area.

Yet the company remains almost wholly exposed to precious metals and therefore policy changes impacting the US dollar. Without leadership at the helm to steer the company through a period of accelerated growth, any rapid-fire takeover approach may well not be in investors’ best interests.

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