Successful Newcrest bid would extend US Newmont’s lead as world’s largest gold producer
On Sunday February 5, new broke that US based Newmont Corp, the world’s largest gold mining company, had submitted an all share deal bid to acquire Australian gold mining company Newcrest Mining Ltd.
Valued at between US$ 16-17 billion, this is the largest takeover announcement in any industry so far in 2023, and if it succeeds would be the largest acquisition ever in the gold mining sector, and the largest mining takeover in Australian corporate history.
Newmont is headquartered in Denver, Colorado, and its shares, under ticker symbol NEM, primarily trade on the NYSE in New York. Newmont is the only gold mining company included in the famous S&P 500 Index.
Newcrest is headquartered in Melbourne, Australia and its shares, under ticker symbol NCM, primarily trade on the Australian Securities Exchange (ASX). Newcrest is the largest Australian gold miner to be included in Australia’s benchmark ASX 200 index. As well as gold, Newcrest also mines copper.
Both Newmont and Newcrest are members of the gold mining industry association, the World Gold Council (WGC). In fact, Tom Palmer, President and CEO of Newmont, is a board member of the WGC, and Sandeep Biswas (most recently CEO of Newcrest) was a board member of the WGC until Biswas stepped down from the Newcrest CEO position in December 2022. Palmer and Biswas also worked together on the administration and audit committees of the World Gold Council.
The Newmont press release on the bid announcement can be seen on the Newmont website here. The Newcrest press release and acknowledgement of the bid can be seen on the Newcrest website here.
Whichever way you look at it (in terms of market capitalization, ounces of gold produced annually, or in ground gold reserves), Newmont Corp is the world’s largest gold mining company, and bigger than its nearest rival Canada’s Barrick Gold Corp (whose ticker is GOLD).
At the time of writing, Newmont had a market cap of US$ 38 billion. Barrick had a market cap of US$ 31.4 billion. And Australia’s Newcrest had a US dollar equivalent market cap of about $15.6 billion.
Newmont said last November 2022 that it was on track to produce 6 million ounces of gold during 2022. Newmont’s full year results for 2022 will be released on February 23. In 2022, Barrick’s gold production totaled 4.14 million ounces (based on preliminary full year results released on January 17).
Newmont claims to have ‘gold reserves’ (measured and indicated gold mineral resources – i.e. than can be mined), of 96 million ounces. The equivalent figure for Barrick is 76 million ounces of ‘gold reserves’.
In fact, in its latest annual report, for 2021, Newmont states that it is the world’s largest gold producer:
“We currently rank as the world’s top gold producer with approximately 5% of estimated total worldwide mined gold production.”
Newmont is no stranger to expansion by acquisition, having acquired Canada’s Goldcorp in January 2019 for US$ 10 billion in an all stock deal. Barrick is also no stranger to acquisitions, having acquired South Africa’s Randgold Resources in 2018 for US$ 6.5 billion in an all share deal.
Following Newmont’s acquisition of Goldcorp, Canada’s Barrick also then made an audacious hostile bid to buy Newmont in 2019 in a $18 billion bid, but this bid was rejected by Newmont in early March 2019.
However, after rejecting Barrick’s bid, Newmont and Barrick decided to sign a joint venture agreement (a week later on March 11, 2019) to combine their Nevada gold mining operations in a structure under which Barrick runs the Nevada mines of both companies. Barrick has a 65% share of the Nevada joint venture, against a 35% share for Newmont. That deal was executed by the current Barrick CEO Mark Bristow, and Newmont’s previous CEO, Gary Goldberg.
Newmont and Barrick also have another joint venture in the Dominican Republic, where they jointly own the Pueblo Viejo gold mine (60% owned by Barrick, 40% Newmont), but where Barrick exclusively operates the mine.
This is why about 75% of Newmont’s gold production is listed as ‘managed operations’ (managed by Newmont), with the remainder listed as ‘non-managed operations’ (since that gold output in Nevada and Pueblo Viejo is managed by Barrick).
The Newmont – Newcrest Bid
The bid that US Newmont has now submitted to Australia’s Newcrest is to acquire 100% of the issued share capital of Newcrest, where Newcrest shareholders would receive 0.38 Newmont shares per Newcrest share, and which would create a combined company that would be 70% owned by Newmont and 30% owned by Newcrest.
Newmont is pitching the bid as a “compelling opportunity for the shareholders of both companies to share in the upside of putting together two complementary businesses”, with Newmont CEO Tom Palmer saying that “the proposed transaction would join industry-leading portfolios of assets and projects to create long-term value across the combined global business.”
After Newcrest received the bid approach, it released a statement on February 6, saying that “the Newcrest Board, together with its financial and legal advisers, is considering the Indicative Proposal”.
Newcrest’s main financial adviser is, wait for it…. JP Morgan, the same JP Morgan which last September paid “$920 Million in Connection with Schemes to Defraud Precious Metals and U.S. Treasuries Markets”. This was in relation to JP Morgan traders manipulating prices of gold and silver futures contracts on the US COMEX exchange.
Interestingly, Newcrest also said in its acknowledgement statement that prior to Newmont’s current offer, it had received a previous bid from Newmont of 0.363 Newmont shares for each Newcrest share, but that the Newcrest board had rejected that proposal as it did “not deliver sufficiently compelling value to Newcrest shareholders”. This initial bid not been publicly known about until now. So the current Newmont bid is its second recent offer for Newcrest, and is 4.7% higher than Newmont’s previous offer (0.38/0.363).
Prior to the bid becoming public knowledge, Newmont shares closed trading on Friday, February 3, at USD 49.85. Newcrest shares had closed the same weekend at AUD 22.45. Based on the exchange rate of 0.7075 AUD per USD at close on February 3 and the offer ratio of 0.38, that valued each Newcrest share at AUD 26.77, which was a 19.25% premium to the AUD 22.45 close price of Newcrest shares on the previous Friday, February 3.
This premium (of bid value to last traded price before announcement) is on the low-side in terms of average premiums in large takeover deals (think of the 30% range as being more common), so Newmont’s bid terms may not be high enough to convince Newcrest shareholders and the Newcrest Board to accept the takeover offer. Therefore, Newmont may need to revise the bid slightly higher, i.e. sweeten the deal.
Update February 16: As expected, Newcrest’s board rejected Newmont’s bid, saying that it “did not offer sufficient value to shareholders“. However, Newcrest said it would “open its books to Newmont", which is a way of now allowing Newmont to come back with a higher bid. See here for details.
The Combined Gold Mines of Newmont and Newcrest
Newcrest is the world’s sixth or seventh largest gold mining company (depending on metrics used), and has operating mines in Australia (the Cadia and Telfer mines), Canada (the Brucejack and Red Chris mines) and Papua Guinea (the Lihir mine).
According to its website, Newcrest produced 1.956 million ounces of gold in fiscal year 2022, as well as 121 kilotons of cooper. This means that a combined Newmont – Newcrest would produce about 8 million ounces (250 tonnes) of gold per year (6 million ozs from Newmont and 2 million ozs from Newcrest), which is nearly twice as much as Canada’s Barrick. Barrick produced 4.14 million ounces in 2022.
Newmont has two gold mining assets in the United States, the “Cripple Creek & Victor Mine Gold Mine” in Colorado, which it fully operates, and the ‘Nevada Gold Mines’ (which is the joint venture with Barrick and operated by Barrick).
In Canada, Newmont operates 3 gold mines, Porcupine and Musselwhite in Ontario, and Éléonore in Qeubec. In Mexico, Newmont runs the Peñasquito mine.
In South America, Newmont has gold mines in Suriname, Peru, Argentina and Dominican Republic. In Africa, Newmont’s gold mining is concentrated in Ghana, where it operates four gold mines.
In Australia, Newmont operates the giant Boddington mine in Western Australia, and the Tanami mine in a remote desert area of the Northern Territories.
So the addition of Newcrest would boost Newmont’s gold mining presence significantly in Canada and Australia, while adding a presence in Papua Guinea. That would give Newmont 21 gold mines across 10 jurisdictions. Newmont might however, only want to retain some of Newcrest’s mining assets, and might therefore divest of some of the Newcrest assets in the event of a successful acquisition.
From Mine to Refinery to Bars and Coins
The majority of Newmont’s sales come from the sale of refined gold. While Newmont’s gold mines primarily produce doré bars – an alloy consisting primarily of gold but also containing silver and other metals – Newmont then sends these doré bars to its precious metals refinery partners, which refine them into bullion 99.95% gold (the required market standard).
This refining is done under the terms of refining agreements which Newmont has with the refiners. The refineries then refine the doré bars for a fee, and credit Newmont’s account with its share of the refined gold and the separately recovered silver. Alternatively, Newmont at times sells the doré bars to other buyers who then get credited with the gold in their accounts at the same refineries (See page 5-6 of Newmont annual report 2021).
The refined gold is then used to fabricate gold bars and gold bullion coins, which are purchased by retail bullion investors, institutions and central banks.
Newmont works closely with some of the world’s best gold refineries. In fact, Newmont was the majority owner of famous Swiss Valcambi gold refinery until 2015, at which point Valcambi was bought by the Indian group Rajesh Exports. Newmont had owned 60% of Valcambi. See BullionStar article “Swiss Gold Refineries and the sale of Valcambi” for details.
In addition to Valcambi, Newmont works with the famous gold refineries MKS PAMP, Argor-Heraeus, The Perth Mint and Asahi Refinery. According to a recent Newmont Sustainability Report from 2018:
“The gold we produce is transported in the form of doré to refineries certified by the London Bullion Market Association (LBMA). Swiss refinery Valcambi refined a majority of Newmont’s doré produced at our North America, Peru and Ghana operations for most of 2018.
In October, we signed new refining agreements, and as a result, Asahi Refinery in Salt Lake City, Utah, now refines the doré produced at our North America operations.
Our Ghana operations use Swiss refinery MKS PAMP and our operations in South America – Yanacocha and Merian – use another Swiss refinery, Argor-Heraeus.
The Perth Mint refines the gold produced at our Australian operations.”
BullionStar has now launched in the United States and we carry a full range of investment gold bars from these very same refineries which NewMont uses to refine its gold.
On the BullionStar.us website, you can now buy gold bars from the refineries Argor Heraeus, Valcambi, PAMP, and Perth Mint, such as Argor-Heraeus 100 gram gold bars, 100 gram Valcambi gold bars, and 100 gram PAMP gold bars.
BullionStar US also stocks a wide range of silver bars including silver bars from the Asahi refinery.
If you opt for delivery, all bullion bars and coins purchased at BullionStar.us come with free delivery across the United States. If you opt for secure storage, all purchases receive 1-year FREE vault storage in our secure precious metals vault in Texas.
Why the Merger and Why Now?
In the capital intensive industry of gold mining and a world of shrinking in ground gold reserves and in ground ‘inferred’ gold resources, some of the usual motivations put forward by mining executives behind acquisition bids are that a merger / takeover will give the acquirer access to additional gold reserves (which makes sense), and also a lower cost of capital (which makes sense).
Also put forward are the cost savings from combining, and the potential ‘synergies’, as well as the geographical diversification benefits across jurisdictions (which could be true depending on the individual situations and on the political risk in the countries in which the mines are located).
The famous mining investor Rick Rule, interviewed recently by BullionStar for the BullionStar Perspectives series, correctly predicted continued merger and acquisition (M&A) activity in the gold mining space, saying that because gold miners and mining companies in general have underinvested in exploration and development for decades, that consequentially the new mine development pipeline is shrinking, which means that the big mining companies have to “Buy Their Way into Relevance" again.
Rick also explains another critical reason why miners need to engage in M&A, which is that the world’s capital markets value size and liquidity, and so mining companies need to create mass and higher trading volume of their shares so as to lower their cost of capital, which “in an industry of intensive capital costs, is absolutely vital" says Rick.
See below for the relevant segment of the BullionStar video interview with Rick, starting at the 9:00 minute mark.
Is this the case here with Newmont and Newcrest? Newmont obviously thinks so, as now Newmont has made a bid and described it as providing ‘long term value’ and ‘upside’ for shareholders. The timing of Newmont’s move may also be strategic since Newcrest currently has no permanent CEO following Sandeep Biswas stepping down, only an interim CEO. Newmont may be using this lack of a permanent CEO at Newcrest as a way to improve its negotiating hand.
Newmont Palmer’s also thinks that there are too many companies in the gold mining sector, and that the sector is ripe for continued consolidation. Palmer has also bought into the climate agenda or at least is using emissions standard pressures as a way to justify the need for sectoral consolidation. According to the FT in October 2021:
“‘One of the challenges for the gold industry is the number of gold companies,’ Palmer told the FT Mining Summit. He noted that there were significantly more gold companies than in other mining sectors. ‘So I think the industry needs to consolidate and I think the catalyst will be climate change.'"
Mark Bristow, CEO of gold mining archrival Barrick is not so sure about the need for takeovers and mergers, but maybe taking the opposing view is par for the course between intense rivals. Both Barrick’s Bristow and Newmont’s Palmer were speaking this week at the same mining conference in Cape Town South Africa, African Mining Indaba, when news of the Newmont-Newcrest bid broke.
Bristow, who is from South Africa and heads Canada’s largest gold mining company, when asked on the sidelines of Indaba about what he thinks of the Newmont bid said “I don’t know. I am puzzled about this. I find it hard to get my head around”. Bristow continued:
“We are looking at M&A possibilities all the time but we are very mindful of the risks. When you are doing mergers of ageing assets you have to be mindful of what you are buying. Then you have to be clear on whether you are doing this just to be bigger or are you doing it for real value.”
Bristow prefers a strategy of organic growth via exploration and mineral resource management so as to replenish reserves and resources. And Bristow said that he has no plan to announce a rival offer for Newcrest:
“While we continue to evaluate all new opportunities against our strategic filters, we have always believed that finding our ounces is better than buying them.“
But maybe this is prudent and strategic talk, for if you were planning to enter a bidding battle against Newmont (to also acquire Newcrest), you would not want to show your cards before you made your move.
However, one part of the equation which seems missing in all of this, be it Newmont or Barrick or any other senior gold producer, is why these mining executive CEOs never focus on the gold price? Gold mining companies, like any business, make maximum revenue when they sell maximum output at maximum price, while minimizing costs.
They will talk non-stop about getting control of more and more gold reserves and resources, and of constantly cutting costs, yet not one of them questions the structure of gold price discovery (which as they well know, is determined by the trading by a cartel of bullion banks of unlimited paper gold, i.e. unallocated gold in London and COMEX gold futures in New York, and not from the trading of real physical gold). Nor will any of these senior gold mining executives ever question the secrecy of the central bank gold lending market or the lack of transparency of the entire central bank gold market in general.
A lot of people may not be aware that Newmont president and CEO, Tom Palmer, is actually Australian, and he attended Monash University in Melbourne before a mining career with Rio Tinto in Australia, followed by roles with Newmont in Perth and Indonesia, before he moved into the very senior positions with Newmont in Denver, Colorado.
Fascinatingly, Newmont and Newcrest also have a lot of history, because Newcrest was actually previously spun off from Newmont. In 1966, Newmont established an Australian subsidiary called Newmont Holdings Ltd. This then subsequently changed name to Newmount Australia Ltd. Then in 1990 Newmont Australia Ltd merged with BHP Gold Mines Ltd, and the resulting combination was renamed Newcrest Mining Ltd, which was then spun off from Newmont.
There was even speculation in 2003 that Newmont was going to make a bid for Newcrest, but this never panned out. Twenty years later, the speculation has now become fact.
When Newmont was founded in 1916 by investor Colonel William Boyce Johnson as a holding company for global mineral and mining investments, the name Newmont was chosen because “he grew up in Montana and made his money in New York“.
Perhaps since the current Newmont CEO Palmer “grew up in Australia" and spent the formative years of his career there, he now wants to leave a legacy of his own on Newmont, by bringing some Australian assets into the Newmont stable in the form of Newcrest.
Whatever the reason, if this takeover goes ahead (after Newmont submits another higher bid), US Newmont will soon be way out in front of any of its peers, as the world’s largest gold producer, and the world’s most valuable gold mining stock on the New York Stock Exchange. That is of course, unless Bristow and the Barrick board decide to enter the contest, pitching Canada vs the US in the battle for Newcrest.
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