Gold’s scarcity makes it precious. Undersupply also explains why top miners sometimes prefer to buy their peers rather than digging up the shiny stuff.
Newmont of the US has bid for Australia’s Newcrest in an all-share tie-up. A deal would reunite the two companies that split more than 30 years ago, creating a gold miner with more than 8mn ounces of production, a $56bn industry behemoth.
Gold has recently returned to favour. Inflation and a desire to reduce dependence on the US dollar has spurred central banks, in particular China, into buying lots of gold, the second-highest ever on a net basis last year. Its spot price has climbed 15 per cent in the past three months.
Even so, rising operating costs have tempered market enthusiasm for gold miners. These trade close to the bottom of their historical book value range — between one to two times — thus consolidation makes some sense.
Newcrest shareholders have not embraced Newmont so far. At least one big shareholder objected to the price. Newcrest shares in Australia rose by just half of the roughly 20 per cent premium (above the three-month average) on offer. Its board had earlier rejected a lower 0.363 exchange ratio. The US miner is now offering 0.38 for each share valuing Newcrest at $16.8bn — less after Monday’s 5 per cent fall in Newmont shares.
That this is not a knockout price explains that reaction. The offer ratio implies an enterprise value at about 8 times ebitda. Shareholders in Canada’s Yamana Gold recently agreed to a share-based deal at a similar multiple, albeit with a $1bn cash sweetener.
Unlike Yamana, Newcrest’s shares have trailed those of its peers by 35 per cent over the past five years. That, and missed production targets, partly explains the departure of chief executive Sandeep Biswas in December
But Newcrest has potential. Its all-in (including capital spending) gold costs at $1,043 were 11 per cent lower than Newmont’s last year and that gap should widen over the next three years, based on Visible Alpha estimates.
Buying lower cost production should help Newmont dilute its own overheads. But to close this deal it will have to give some of that cost reduction back to Newcrest.
