NCMGF - Newmont: Highlights Of August Proxy Filing For Newcrest Takeover

2023-08-28 23:56:10 ET

Summary

• Newmont is set to become the largest gold miner in the world through its merger with Newcrest Mining.
• Despite some challenges, Newmont's valuation has improved on its share price slide during 2023, while the merger could lead to enhanced profits and dividends.
• The merger offers cost synergies, increased copper production/reserves per share, and reduced risk through the addition of Tier 1 assets.

Newmont ( NEM ) is about to become the clear leader in the gold mining industry, based on sheer size for equity market value, annual ounces produced, metal reserves/resources, sales, income, and diversification of assets around the world. The slated merger with Newcrest Mining ( OTCPK:NCMGF ) ( OTCPK:NCMGY ) ( NCM:CA ) out of Australia has a transaction closing targeted for Q4 2023. A few days ago, Newmont filed its Preliminary Proxy Statement for shareholders to review before final voting takes place.

For Newmont shareholders, 2023 has been a rough year, as the share price has stumbled around trying to digest the somewhat dilutive effect on immediate operating metrics (when announced on trailing 12-month results) after the takeover. Another negative for investor interest, issues with a 3-month strike at its important Peñasquito mine in Mexico have become this year's industry posterchild for the jurisdiction risk of running mines outside of the safest geopolitical locations of the U.S., Canada, and Australia. CEO Palmer even stated he is willing to consider selling the mine , if local workers are unwilling to move on management's latest offer.

Yet, the lagging performance by Newmont has opened a contrarian buy situation, just as gold/silver/copper looked primed for a new upleg in price. I have expressed my now super-bullish views of the precious metals in numerous articles on this website over the last 18 months. Long story short, mine supply of each metal is beginning to badly lag rising demand trends globally. Gold is preparing for a run higher in U.S. dollars as a devaluation of this critical currency is looking more certain on a slowing economy with rising Treasury debt issuance needs, while sharply growing green energy solar panel demand requires ever greater amounts of silver and electric vehicle motor production is propelling vastly expanded copper demand.

So, Newmont's valuation is now much stronger than a year ago, while its long-term prospects to deliver profits and dividends to owners may actually take an important step forward on a finalized merger with Newcrest.

Terms/Rationale for Combination - May 2023

On May 14th, the two companies announced the definitive terms of a merger . Basically, Newcrest shareholders are to receive 0.400 Newmont shares (or 0.400 Newmont CDI) for each Newcrest share and a special dividend of up to $1.10 per share paid by Newcrest.

The joint press release summarized how the combination would benefit both groups of shareholders, with slashed duplicate costs, synergy and asset sharing advantages, on top of a more diversified resource base for each ownership share. Highlights of the merged portfolio of assets were explained in May,

This acquisition would create a world-class portfolio of assets with the highest concentration of Tier 1 operations (10 of them), primarily in favorable, low-risk mining jurisdictions. Supported by this portfolio, Newmont will be well-positioned to generate strong, stable and lasting returns with best-in-class sustainability performance, well into the future.

Through the combination of high-quality operations, projects and reserves, this portfolio is expected to deliver:

Outstanding depth and breadth of global production focused across stable mining jurisdictions: ⁸

• Approximately 8 million ounces of total combined annual gold production upon closing the Transaction, with more than 5 million gold ounces, or two-thirds of total gold production, from 10 large, long-life, low cost, Tier 1 assets
• Combined annual copper production of approximately 350 million pounds from Australia and Canada

An extensive portfolio of greenfield and brownfield growth options from the industry’s largest reserve and resource base:

• 96 million ounces of gold reserves declared by Newmont and 52 million ounces declared by Newcrest, along with 111 million and 68 million ounces of gold resources, respectively ⁹
• Significant majority of combined entity’s gold reserves will be located in the Americas and Australia
• Value-generating projects across some of the world’s most prospective regions including Canada’s Golden Triangle

Meaningful increase in copper reserves, a critical metal in facilitating the transition to a new energy economy

Maintaining a disciplined approach to mine planning and project development at reserve gold pricing, creating a resilient business to maximize long-term returns

Proxy Statement - August 2023

The preliminary proxy statement sent to shareholders at both companies came out August 23rd, explaining a list of reasons why owner should vote in favor of the combination. The primary reasons management chose to highlight are listed below,

The Newmont board of directors believes that Newmont’s proposed combination with Newcrest represents an opportunity to maximize value for Newmont’s stockholders and will enable the combined company to deliver safe, profitable and responsible gold and copper production based on a world-class portfolio of Tier 1 operations, projects, mineral reserves and resources and talent. We expect the Transaction to close in the fourth quarter of calendar year 2023 and to deliver the following benefits for Newmont and its stockholders:

• Be highly accretive for Newmont stockholders, providing opportunities to enhance near-term cash flows, targeting at least $2 billion in the first two years after implementation through portfolio optimization;
• A combined approximately $500 million in estimated annual pre-tax synergies, expected to be achieved within the first 24 months;
• Enhanced gold production based on approximately 8 million ounces of historical total combined annual gold production, before portfolio optimization, combining Newmont’s approximately 6 million ounces of gold production for the year ended December 31, 2022 and Newcrest’s approximately 2 million ounces of gold production for the year ended June 30, 2023, with more than 5 million gold ounces, or two-thirds of total combined gold production, from ten large, long-life, low-cost, Tier 1 assets (as defined in the accompanying proxy statement);
• Robust copper production from Australia and Canada, based on approximately 377 million pounds of historical total combined annual copper production from Australia and Canada, combining Newmont’s approximately 84 million pounds for the year ended December 31, 2022 and Newcrest’s approximately 293 million pounds (133 thousand metric tons) for the year ended June 30, 2023;
• Result in the industry’s largest gold reserve and resource base;
• Maintain Newmont’s industry-leading, non-binding dividend framework, which has returned over $4.5 billion to stockholders since it was established in October 2020, reflecting a robust platform to drive leading returns through the price cycle;
• Offer financial flexibility and an investment-grade balance sheet to advance value-accretive development opportunities and sustainably improve overall shareholder returns;
• Feature a deep bench of experienced leaders, subject matter experts and existing regional teams in Australia and Canada with extensive mining industry experience; and
• Maintain industry leadership in environmental, social and governance performance.

The merger ideas that stand out most to me are: (1) the cost synergies and likely asset rationalizations (sales of a limited number of resources) that should create a lower overall cost-structure than keeping the two companies separate, (2) Newmont's addition of copper production which is highly accretive to existing shareholders, and (3) a decrease in the risk of running any single mine, by adding many new Tier 1 assets, essentially large-scale mines in safer jurisdictions.

Pro Forma Combined Income Statement

Reviewing how Newcrest's assets will improve upon the existing Newmont business setup, we can see how the disruptive 2023 Peñasquito strike would have had less negative impact on the combined business operation. For the first half of 2023, combined pro forma EPS would have been $0.84 vs. the standalone NEM number of $0.62.

Pro Forma Combined Balance Sheet

Additionally, Newcrest's more conservative balance sheet will mean pre-merger NEM's balance sheet (which was already one of the strongest in the major gold mining industry) will actually become even safer and less leveraged. Even better news is the company will likely sell off a few of Newcrest's assets to reduce debt and leverage further during 2024.

Price Reversal and Breakout

My original analysis was the proposed merger would initially create some downward pressure on the stock quote, because of slightly dilutive metrics upfront. I actually sold most of my NEM position after the May announcement. However, I have built it back up during August to one of my top major miner positions.

At this stage, I feel the selloff and share price rerating exercise have gone too far, with better long-term growth and smarter diversification now the forward story to focus on.

It appears other large traders and investors are coming to a similar conclusion. The -15% share price drop since mid-July has been a low volume (the lowest selling volume decline on the 18-month chart below), arbitrage-like drawdown with the gold mining sector.

In terms of improving technical momentum, the share price is still holding above its November bottom, and the Accumulation/Distribution Line has been in a rising trend since that point. On top of these minor bullish signals, On Balance Volume has not dropped below its May reading despite price sliding a tad lower, and the 20-day Chaikin Money Flow indicator is highlighting less selling pressure than May-June.

My last Newmont article in July here , explained how a breakout to the upside was getting close. I still believe Newmont is well situated to rise dramatically into 2024. Drawing a green trendline through peaks since January (or even back to April 2022), the new turnaround "breakout" price level is now down to $43.

Final Thoughts

The Newmont/Newcrest merger is now completely price into shares, in my opinion. I recently upgraded my gold mining sector view to Strong Buy from Buy , explained in this weekend's Direxion Daily Gold Miners Index 2x Bull ETF ( NUGT ) article linked here .

If the whole sector is ready to jump higher, and Newmont is the largest and perhaps safest individual company of them all, a below average forward 1-year P/E 14x (an unusual discount to the S&P 500 equivalent of 18x) is quite attractive for new investment. With many of its mines having production profiles beyond 20 years, any significant uptick in gold/silver/copper prices will flow directly toward quickly rising EPS and much better profit margins on sales. Such an outcome will surely catch the attention of Wall Street analysts, hedge funds, and capital allocators across the globe.

Seeking Alpha computer sorts put a Quant Rank on Newmont in the top 20% of all U.S. stocks, even after factoring in its relative price underperformance vs. the S&P 500 in 2023. Once price gets moving to the upside, this score will only rise from today.

What are the risks to investment? Two ideas stand out as being particularly bearish, if they occur. First, falling metals pricing instead of rising would clearly hurt the operating results and attractiveness of holding gold miners. Second, and more likely in my mind, is a dramatic selloff on Wall Street generally (the resumption of a bear market) could hold the NEM share quote in check.

However, if we experience sharply rising precious metals pricing, even a mild bear market drop for the typical U.S. equity of -15% to -20% into the autumn months may not being able to keep NEM's price from rising back above $50.

And, assuming gold's price is headed above US$2,500 an ounce (my base forecast), silver above $35 an ounce and copper above $5 per pound, super-high profit margins and EPS growth (to $4+) could push the merged Newmont share price above $75. Such would be good for a total return gain of +100% (including a 4% to 5% dividend yield) from $38 a share today, over 12 months or less.

On the downside, weaker metals pricing (of say -10%) could push NEM to $30 a share, which represents downside risk potential of -25% for a total return. Looking at the whole risk/reward setup, worst-case scenario downside of -25% vs. upside best-case potential of +100% is now heavily skewed toward a bullish position.

I continue to rate Newmont a Buy . It is a core position of mine in a well diversified precious metals portfolio, alongside the other major gold mining leaders of Barrick Gold ( GOLD ) and Agnico Eagle ( AEM ).

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

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