Looking at the 2022 annual report and accounts from Newmont it is not hard to work out why it wants Newcrest
(ASX:NCM), but only under the terms of its $A24.4 billion all-share bid.
Newmont is offering 38% of one of its shares for each Newcrest share – a problematic offer because there’s no cash and Newmont only had liquidity of $US6.9 billion ($A10 billion) at December 31.
That might be enough to sweeten the offer to win approval, but Newmont will want to borrow the cash 9and get the write-off for the interest bill) and several shareholders have told Reuters they would not support higher borrowings by Newmont.
Which leaves it at a bit of an impasse and the current offer will not fly because of the strong rejection by the Newcrest board which wants Newmont to pay upfront and recognise the gains that buying Newcrest will bring to a merged company.
It’s all about production and costs – Newcrest will add more than two million ounces of gold and close to 70,000 tonnes a year of copper and several hundred thousand ounces of silver to Newmont’s 5.9 million ounces of gold, around 45,000 tonnes of copper as well as a small amount of silver.
But look deeper at Newmont’s recent and forecast gold production and you’ll find the answer why it needs Newcrest.
In short, Newmont might be the world’s biggest gold producer by a considerable margin over second placed Barrick, but Newmont’s gold production is going nowhere and won’t get a significant boost without a major deal like buying Newcrest.
Newmont’s 2022 gold production was 5.96 million ounces against 5.97 million in 2021 and the latter figure is a story in itself because in December 2020 the company forecast that it saw production the following year reaching 6.5 million ounces. It didn’t as problems at several mines, heavy rain and Covid restricted output and output has stagnated since.
In the latest five year forecast in the 2022 annual results, Newmont says gold production in 2023 will be in the range of 5.7 to 6.3 million ounces (a midpoint of around 6 million ounces), and is forecast not to reach 6.5 million ounces until 2024 or 2025. That’s without Newcrest.
Newmont forecasts its gold production will be in the range of 5.7 million to 6.7 million ounces by 2027 – in other words a ballpark estimate, judging by the way it has failed to top 6 million ounces for one reason or another (Covid, weather, mining problems, low grades, mine sequencing etc) and yet continued to grow.
Newmont’s annual revenue in 2022 was static at $US11.9 billion and it is hard to see that improving over time to a significant degree without the extra ounces from an acquisition of a company like Newcrest or a sharp rise in the gold price – which was boosted last year by the Russian invasion of Ukraine and then eased.
Buying Newcrest would push Newmont’s 2024 output to more than 8 million ounces – a boost of a third. And a takeover would join the lower cost Newcrest (especially its Brucejack mine in Canada and Cadia operation in NSW) with the lower cost Australian mines of Newmont – Boddington and Tanami.
Doing that would help Newmont improve its problematic ability to control its costs.
In 2022, Boddington and Tanami sold a total of 1.299 million ounces of gold, plus copper and silver. Boddington sold 813,000 ounce in 2022, making it the most productive of Newmont’s mines, while Tanami produced 486,000 ounces of gold. they were two of the top four most productive mines in Newmont’s huge portfolio. Tanami is being expanded and by 2025 it could be producing close to 700,000 ounces of gold a year.
Newcrest’s All in Sustaining Cost (AISC) in the six months to December fell to $US1,089 an ounce with the addition of production and sales from the Brucejack mine in Canada from $US1,190 an ounce in the December, 2021 half year.
For the AISC to fall in a six-month period when costs soared, especially energy (and diesel in particular), tells us how vital the extra ounces from Brucejack are and how well Newcrest controlled costs elsewhere, especially with Cadia’s output growing again.
The AISC for Boddington and Tanami also fell last year to $US950 an ounce from $US1,002 in 2021 while Newmont’s overall AISC rose.
The production and cost benefits for Newmont is why it said its release on Thursday that it believes a buyout of Newcrest would create “significant value” for shareholders and that it is in talks with its Australian rival’s board of directors about closing a deal.
Whose shareholders is the moot point. On those figures for production growth potential and lower costs, it is Newmont shareholders who will get the greater benefit while Newcrest shareholders – if they remain in the merged company – get a bunch of costly and not very productive mines outside of the Australian duo.
For 2023, Newmont’s production guidance of 5.7 million and 6.3 million ounces of gold came with an all-in sustaining cost estimate between $US1,150 and $US1,250 per ounce compared with the AISC in 2022 of $US1,211 an ounce.
Newmont CEO Tom Palmer said on Thursday he was “disappointed” that Newcrest rejected the latest offer, but added that he is in active talks with Newcrest’s board of directors.
“Given the challenges in the mining industry, there has never been a better time for two friends to come together,” Palmer told investors on a conference call after the company posted lower-than-expected quarterly results for the three months to December.
“If we can reach an agreement, this combination of industry-leading talents, decades of collective experience would create significant value across the global business with an ideal mix of gold and copper.”
Some Newcrest shareholders have called for a higher offer but one of Newmont’s largest shareholders told Reuters it would not want the company overpaying for its rival.
“If someone pays 30% above market price, there needs to be a very good explanation for why they are doing it,” said Simon Jager, portfolio manager at Flossbach von Storch, which is one of the ten largest investors in Newmont, according to Reuters.
And Canada’s National Bank said in a commentary on Newmont’s results on Thursday, “We would be buyers today on any underperformance (in the Newmont share price) but could see additional near-term weakness if Newmont raises its bid for Newcrest.”
Revenue for the 4th quarter fell 6% to $US3.2 billion compared to final quarter of 2021. Newmont said attributable gold production for the fourth quarter edged up to 1.63 million ounces from 1.62 million ounces a year earlier.
Average realised gold prices fell 2.2% to $US1,758 per ounce in the quarter from a year earlier. That’s higher than Newcrest’s $US1,696 an ounce (down from $US1,733 an ounce in the December, 2021 half.
Newmont shares rose nearly 0.7% to $US44.26 on Thursday. despite that small gain, the shares are still down more than 10% year to date in 2023, while the gold price is all but steady around $US1,830 after rising above $US1,900 in late January
Newcrest is the best solution to Newmont’s production and cost problems, but the price will have to be right.
