• Newcrest is in play after Newmont lobbed a ~$24bn all scrip bid for Australia’s largest gold miner yesterday
  • Corporate advisor and gold expert Liam Twigger says the major M and A deal could see corporate activity cascading down the sector
  • But big miners may be wary of the cost and quality of Australian assets outside of Newcrest’s Tier 1 mines

There are any number of reasons for Newmont, led by Australian former Rio Tinto (ASX:RIO) executive Tom Palmer, to launch its $24 billion Newcrest bid right now.

For those unaware of the big, big gold news yesterday, the world’s biggest gold miner Newmont, with Bank of America and Lazard in tow, has made the second of two representations in recent weeks to Newcrest, Australia’s largest listed gold producer.

Its 0.38 for 1 share offer, valuing Newcrest at $27.16 or a 21% premium to its February 3 closing price, sent the ASX 50 mining giant’s stock up 9.3% yesterday and came after some ructions in the press forced Newcrest to put the latest bid out in the open.

The deal could give ASX investors easy access to locally listed CDIs of Denver-based Newmont and would extend the 6Mozpa miner’s lead over close Canadian rival Barrick as the world’s biggest gold producer.

That pissing contest for scale with Barrick (a common phenomenon of late booms) is a potential reason for the Newcrest raid, which would see Newmont reattach a company it spun off as a local subsidiary all the way back in 1966.

Since 1990 Newcrest has held its standalone moniker, shortly after a local listing and merger with BHP’s gold division. With major mines like the Cadia and Telfer operations on its books, it has grown into the undisputed number 1 in the Australian gold market.

But it is currently in a position of relative weakness. Long-term managing director Sandeep Biswas retired in December. While CFO Sherry Duhe is in the hot seat as the interim CEO, a permanent replacement has not yet been chosen.

Meanwhile, it is a long way off its five-year highs. Even at the artificially inflated $24.53/oz closing price yesterday and up 26% over the past six months, Newcrest shares are well off the $38.62 price they enjoyed in August 2019.

At the same time US dollar gold prices have risen almost US$400/oz since, fetching US$1878/oz yesterday or $2703/oz Aussie.


Is it a sign of more to come?

Since Barrick and Randgold merged in 2018, there has been an arms race to grow bigger among the world’s top gold producers, who have found their success in exploration wane over the past decade.

It was followed by Newmont’s US$10b buyout of Canada’s Goldcorp, and a cheeky bid by Barrick and its iconoclastic boss Mark Bristow for Newmont, killed by an agreement from the top gold miners to JV their Nevada assets.

It came to life again last year with acquisitive Canadian gold miner, global number three Agnico Eagle, securing a merger with fellow Canucks Kirkland Lake, before joining Pan American Silver to outbid South Africa’s Gold Fields in a US$4.8b buyout of Yamana Gold.

Newcrest has done smaller deals, making a major copper and gold discovery in WA called Havieron in a JV with London-listed junior Greatland Gold and paying ~US$2.8 billion for Canadian producer Pretium Resources to secure its 300,000ozpa plus Brucejack mine.

The most ambitious deal in the WA gold space has been Northern Star’s (ASX:NST) at the time $16b merger with Saracen Mineral Holdings announced in 2020 and completed in 2021, which consolidated Kalgoorlie’s Golden Mile under one owner for the first time in its history.

One of the burning questions is whether Newmont’s bid for Newcrest, if successful, will be the exclamation mark that closes this period of major consolidation, or the launching pad for a “cascade” which sees corporate activity accelerate and trickle down to the smaller end of the market.

“2021 and 2022 were all about equity raisings and now with valuations where they are it’s consolidation and people looking for critical mass and more assets in good jurisdictions,” Liam Twigger, deputy chair of Perth corporate advisory firm Argonaut told Stockhead.

“There definitely will be further M & A activity cascading down from the majors to the mid caps to the juniors as they all follow suit.”


A question of cost

Twigger thinks the attraction of Newcrest to Newmont is in its Australian assets.

At Cadia it boasts one of the largest gold mines in Australia, which importantly for Newmont has a long-term outlook at high production levels and low operating costs.

The NSW gold mine is expected to deliver 560,000-620,000 of Newcrest’s 2.1-2.4Moz of gold production in FY23 and around 70% of its 135,000-155,000t of copper.

With its scale and copper credits, those ounces have so far come in at an all in sustaining cost of just US$67/oz and margin of US$1629/oz so far in FY23.

Those kinds of cost structures are projected to be in place for a while to come. A study on an approved expansion of the block cave known as the PC1-2 development boasts AISC in real terms over its 16-year life of just US$148/oz or $198/oz Australian.

The ~400,000ozpa Telfer mine in WA has been less rosy on that front. But Newcrest is moving towards a decision to develop the underground 160,000ozpa Havieron mine, which promises to bring higher grades into the production profile at the decades-long project.

Those pick-ups would place four of Australia’s largest gold mines on Newmont’s roster, making it a dominant player in the Down Under gold scene. It already boast two of Australia’s five largest gold mines in the Callie mine in the Northern Territory and Boddington in WA’s South West.

Twigger thinks Newmont’s attitude towards Newcrest’s ~800,000ozpa Lihir operation in the tetchier jurisdiction of Papua New Guinea and its recently acquired Canadian assets is less certain.

“The question will be what ones they keep, what ones they let go,” he said.

Does it put other large Australian miners like Northern Star (ASX:NST) and Evolution (ASX:EVN) in play?

The issue when it comes to acquiring those companies could be their cost performance.

“You need to have your all in sustaining costs at a Tier-1 (level) taken for the majors, you’ve got to have cash costs that don’t blow out their cost structure,” Twigger said.

After a period of super high inflation, the vast bulk of Australian gold miners are struggling on that front. According to analysis from Aurum Analytics and Argonaut PCF in their quarterly gold report, the average AISC across Aussie and Kiwi gold mines rose 10.3% or $188/oz in September to $2012/oz, up from $1824/oz in the June quarter.

Northern Star ($1766/oz through the first half) and Evolution ($1185/oz) are better than the average. But EVN is aided significantly by copper credits at its Ernest Henry mine in Queensland and Northern Star, which expects to bring costs down to $1630-1690/oz for FY23 with a stronger second half, sees inflationary pressure continuing.

Boss Stuart Tonkin told analysts it would take increases in scale — NST wants to ramp up from ~1.6Moz to 2Mozpa by 2026 — to counteract cost rises brought about by labour and materials inflation.

NST did note in its recent quarterly report that over the past 12 months, it was the best-performing senior global gold stock on a total shareholder return (TSR) basis, delivering a TSR of 20% compared with the S&P/TSX Global Gold Sector Index TSR of -1% and VanEck Gold Miners ETF TSR of -7%.

Both are also yet to complete planned turnaround jobs at their North American operations — NST’s Pogo and EVN’s Red Lake — with the movement of Aussie companies into Canada and the US still yet to bear fruits in the gold sector.


Big goldies share prices today:




Decent off cuts

On the other hand companies like Northern Star or Evolution could well feed off the scraps left behind by the proposed Newmont-Newcrest merger.

If they do sell any mines, especially Australian assets, the number 2 and 3 ASX gold miners could be in the driver’s seat. Indeed, it was Barrick and Newmont’s desire to exit their mid-scale Australian operations that made NST and EVN the large caps they are today.

Off cuts like Kanowna Belle, Cowal, Jundee and Kundana actually turned out to be the beef cheeks of the mining world, cheap cuts of meat which would be finessed into high end dining. Take Kundana for instance, sold by Barrick to NST along with Kanowna Belle for $75 million in 2014, that operation alone traded in 2021 for a whopping $400m to Evolution.

Meanwhile, analysts wonder whether Newmont could face challenges from Barrick and Agnico for its coveted prize.

“Given the scale of Newcrest any other suitor would likely need to be of material size,” RBC’s Alex Barkley said.

“Based on this criteria, RBC’s North American gold analyst John Wolfson believes the most likely Western gold miners would be Barrick Gold and Agnico Eagle.

“Indeed, the original AFR article commenting on the potential merger suggested Newmont, Barrick and Agnico Eagle as the three most likely candidates (the latter two have not commented on the report).

“Of these three stocks (which Josh covers), he considers NEM would likely have the greatest strategic and synergistic benefits.”

Barkley thinks the deal valuation is reasonable, but cautioned it may not be seen that way by all Newcrest shareholders who could view the offer as an opportunistic bid to take advantage of its leadership vacuum and could be seen as underpaying for its major copper bounty.

At the same time it will allay operational concerns around Telfer, Lihir, which despite a long term ramp up profile to 1.2Mozpa has suffered issues with water supply that has curbed production, Wafi-Golpu in PNG and Red Chris in Canada, as well as delays in approvals for the process plant capacity upgrade to underpin the Cadia expansion.

“The deal premium would give NCM upfront value realisation for its long-life gold-copper operations and projects,” Barkley said.

“It would allow NCM owners to somewhat sidestep near-term operational risks and the longer-term risks from delivering multiple technically complex projects.

“The proposed bid has come in a transition period for NCM management; who have an interim CEO among other recent changes. Owners may see the bid as either opportunistic or alternatively, an answer to management uncertainty.”

Liam Twigger is the chairman of London-listed SolGold, which counts Newcrest as a substantial shareholder.