2023-03-15 16:36:24 ET
Summary
- On March 13, 2023, we learned from Seeking Alpha that Newcrest Mining Limited and Newmont Corporation agreed on terms for a round of early-stage takeover talks.
- As a Newmont Corporation shareholder, I do not favor such a deal and will vote against the merger, which I considered already too expensive with the 0.38 swap.
- I recommend buying Newcrest Mining Limited between $15.50 and $16 with possible lower support at $14.75.
Introduction
Note: This article is an update of my article published on March 09, 2023, where I promised to post an update related to the potential Newmont Corporation ( NEM ) acquisition of Newcrest Mining Limited ( NCMGF ). Below is a quick presentation of the location of the combined assets if the merger is completed.
NCMGY NEM Merger Assets location (Joe Felizadio - S&P Global Market Intelligence)
Newcrest Mining owns six producing mines and three project developments: Red Chris in Canada, Havieron in Western Australia, and Wafi-Golpu in Papua New Guinea. Wafi-Golpu is excellent potential for Copper, but Papua New Guinea is not the best jurisdiction for mining.
Below is shown the gold, copper, and silver production history.
Mines | 4Q21 | 1Q22 | 2Q22 | 3Q22 | 4Q22 |
Cadia Gold in ounces | 115,362 | 149,568 | 186,766 | 142,194 | 169,262 |
Cadia Copper in Tonnes | 18,207 | 23,287 | 28,676 | 23,406 | 27,146 |
Lihir Gold in ounces | 163,937 | 169,486 | 212,932 | 165,243 | 154,143 |
Telfer Gold in Tonnes | 112,726 | 96,388 | 97,443 | 84,372 | 87,985 |
Telfer Copper in ounces | 3,536 | 3,521 | 3,008 | 2,962 | 3,256 |
Brucejack Gold in ounces | 0 | 17,001 | 90,408 | 84,123 | 51,813 |
Red Chris Gold in ounces | 9,527 | 8,463 | 13,678 | 12,259 | 10,163 |
Red Chris Copper in Tonnes | 4,675 | 4,226 | 6,987 | 6,090 | 4,162 |
Fruta del Norte Gold in ounces | 34,533 | 38,933 | 35,805 | 38,923 | 38,764 |
Total Gold Production in ounces | 436,085 | 479,839 | 637,032 | 527,114 | 512,130 |
Total Copper production in Tonnes | 26,418 | 31,034 | 38,671 | 32,458 | 34,564 |
Total Silver production in ounces | 187677 | 215461 | 435587 | 361957 | 303537 |
From Fun Trading file.
NCMGY Quarterly Production Gold and copper history (Fun Trading)
Quarterly AISC history.
NCMGY Quarterly AISC history (Fun Trading)
1 - Potential acquisition in progress
On February 5, 2023, Newcrest Mining announced that it received an indicative nonbinding bid from Newmont Corp. to acquire Newcrest through a scheme of arrangement valued at the time at about $17 billion.
Newmont proposed to exchange 0.38 shares of NEM for one share of Newcrest in an all-share transaction. The merger would boost Newmont's lead as the world's largest gold producer, with expected production of 9.4 million ounces in 2023, and add a significant copper production.
It is somehow a final reunification, because Newcrest Mining was founded in 1966 as the Australian subsidiary of Newmont Corp. After merging with Australmin Holdings Ltd. and acquiring BHP Group Ltd.'s historical gold assets in 1990, Newcrest Mining was spun off as a separate entity.
Newcrest rejected the proposition on February 16, 2023, but left the door open for negotiations. After Barrick Gold (GOLD) indicated it was uninterested, Newmont was the only suitor.
I would like to acknowledge the nonbinding indicative proposals received from Newmont. Today, we announced that the new Crest Board has unanimously rejected the latest proposal on the basis that does not represent sufficient value for Newcrest shareholders. The Board has, however, decided to allow Newmont access to limited nonpublic information on a nonexclusive basis so that they may consider any future proposals on terms that appropriately reflect the value of Newcrest.
On March 13, 2023, we learned from Seeking Alpha that Newcrest Mining and Newmont agreed on terms for a round of early-stage takeover talks, Australian Financial Review reported . The agreement puts the possible $22.4 billion deal back on track (the deal's valuation fluctuates depending on the share price).
1.1 - My opinion
It reminds me of the recent acquisition of Kirkland Lake gold by Agnico Eagle Mines Limited (AEM), which I discussed in my article on October 7, 2021. I was a shareholder of AEM and KL then and was unhappy with the merger, while other authors considered this deal the "deal of the century." The same thing is happening here. I said at the time:
However, what can be a good idea at the business level can be a bad idea from a long-term shareholders' perspective, and I think it is the case here, unfortunately. It comes to the same recurring issue. Bigger is not necessarily better.
It is difficult to estimate this deal at the business level, and to tell you the truth, it is not an exercise that interests me very much. Not because it is not attractive, but because it is not what shareholders should be looking at as a priority.
Anyway, I have presented a quick review of Newcrest's balance sheet in this article to familiarize myself with Newcrest Mining. If you look at my recent article on Newmont Corp., you will get a pretty good idea of the balance sheet pro forma of the potential Newco.
In short, Newmont Corporation will probably complete this deal for Newcrest Mining Limited, unfortunately, and pay more than it should have, which is standard.
The stock price will dive no matter what, which may be an excellent opportunity to accumulate (little solace here for those willing to wait and be patient). The Newco will get bigger, which looks good on paper with a better copper segment, and it will take eons for the stock to regain a fair valuation.
As a NEM shareholder, I do not favor such a deal and will vote against the merger that I considered already too expensive with the 0.38 swap that will probably rise. Moreover, I do not see much costs synergies here.
On the other hand, NCMGY shareholders will get a good deal and can own stock in a solid company.
2 - A quick summary of Newcrest Mining's balance sheet
2.1 - Balance sheet history - The raw numbers
Newcrest Mining | 4Q21 | 1Q22 | 2Q22 | 3Q22 | 4Q22 |
Total Revenues in $ Million | 2,172 | 2,404 | 1,716 | 2,491 | 2,137 |
Net Income in $ Million, including discontinued | 553 | 611 | 298 | 574 | 293 |
EBITDA $ Million | 1,161 | 1,307 | 753 | 1,322 | 939 |
EPS diluted in $/share | 0.68 | 0.75 | 0.36 | 0.67 | 0.33 |
Cash from operations in $ Million | 992 | 1,310 | 423 | 1,257 | 429 |
Capital Expenditure in $ Million | 573 | 482 | 669 | 632 | 549 |
Free Cash Flow in $ Million | 419 | 828 | -246 | 625 | -120 |
Cash and short-term investments $ Million | 1,850 | 1,985 | 1,355 | 675 | 764 |
Total Debt in $ Billion | 2,074 | 1,635 | 1,700 | 1,779 | 2,264 |
Shares outstanding (diluted) in Million | 819.26 | 819.02 | 820.94 | 870.63 | 896.02 |
Note: From the press release .
2.2 - Newcrest revenues were $2,137 million in 4Q22
NCMGY Quarterly Revenues history (Fun Trading)
Revenues were 2,137 million in 4Q22, slightly lower year-over-year and 14.2% sequentially. The company delivered an underlying profit of $293 million and an operating cash flow of $429 million, with an AISC margin of $585 per ounce.
NCMGY Quarterly Gold and copper prices history (Fun Trading)
The company was struggling with drought conditions and the temporary suspension of operations at Brucejack mine following the tragic fatality in October 2022. Newcrest Mining expects operating and financial performance to improve in the second half of 2023.
2.3 - Newcrest reported a free cash flow loss of $120 million in 4Q22
NCMGY Quarterly Free cash flow history (Fun Trading)
Note: The generic free cash flow is the cash flow from operations minus CapEx.
NCMGF's trailing 12-month Free Cash Flow is substantial, with $1,087 million and a loss of $120 million in 4Q22.
The management declared a quarterly dividend of $0.35 per share in 4Q22.
Interim CEO Sherry Duhe said in the fiscal Q2 2023 conference call :
Our first half performance, together with the cash received from Lundin Gold following early repayment of the gold prepaid credit facility, has enabled us to reward our shareholders with an interim dividend of $0.15 per share and a special dividend of $0.20 per share, both fully franked.
2.4 - Newcrest's LT debt (including current) was $2.264 billion at the end of December 31
NCMGY Quarterly Cash versus Debt history (Fun Trading)
Newcrest had total cash of $764 million and long-term debt, including current, of $2,264 million. Net Debt is $1,500 million.
Technical Analysis (Short Term) and Commentary
NCGMY TA Chart short-term (Fun Trading StockCharts)
Note: The chart has been adjusted for dividends.
NCMGY forms an ascending channel pattern, with resistance at $17.75 and support at $15.75.
the pattern can be considered bullish . Sometimes, though, an ascending channel may form within a longer-term downtrend. In this case, the pattern most often than not means a pause in the downtrend, though sometimes it is an early sign of a reversal.
The short-term trading strategy is to trade LIFO about 35-40% of your position and keep a core long-term position that will become a new position in NEM.
I suggest selling Newcrest Mining Limited between $17.50 and $18 with possible higher resistance at $19.35 and waiting for a retracement between $15.50 and $16 with possible lower support at $14.75.
Of course, this recommendation must be adjusted if a deal is agreed upon, which may be more favorable for Newcrest's shareholders.
Gold turned bullish recently and is now above $1,900 per ounce. I am optimistic for H2 2023 for the gold sector, even if the copper price may not fare as well.
The market believes the odds are about 80% for a 25 points hike soon and sees the Fed adopting a more dovish position afterward. Furthermore, the recent bank insolvency problem may push the Fed to pause interest hiking sooner while inflationary pressures are slowing down.
NCMGY 1-Year chart gold and copper (Fun Trading StockCharts)
Watch the gold price like a hawk.
Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.
For further details see:
Newmont Acquisition Of Newcrest: Another Blow Coming Shareholders' Way