Vice President: Daniel Dutch
Analysts: Aaron Cohen, Joshua Green, Gal Gazit, Adam El Jazouli
Acquirer – Newmont Corporation
Acquiree – Newcrest Mining
Deal Size –$19.5b (bid)
Acquirer Advisors – Bank of America Securities, Centreview Partners LLC, Lazard
Acquiree Advisors – JP Morgan, Gresham Advisory Partners
Deal Overview
After a failed initial bid of $16.9bn in February of this year and a four-week standoff, the Newmont Corporation has persisted with their ambition of acquiring rival gold mining firm Newcrest Mining, announcing news of a revised “best and final” offer on April 10th worth $19.5bn for a 31% stake in the firm. (Reuters, 2023) This announcement came with the fact that they have begun the confirmatory due diligence stage of the deal which is expected to last approximately 4 weeks. During this phase Newmont will devise a proposal outlining the planned structure of the takeover which it will then present to the Newcrest Board of Directors, the deal will then be set in motion if and only if the Newcrest Board of Directors unanimously accept the proposal. The next stage of the deal if all goes as planned for Newmont would be a series of regulatory checks by various international stakeholders.
Newcrest Mining Overview
Based in Melbourne, Australia, Newcrest Mining are both domestic and international giants in the gold mining industry. Not only are they the largest publicly listed gold producing company on the Australian Securities Exchange, they’re also the 7 th largest producer of gold worldwide in terms of production volume, producing a reported 2.06Moz of gold in FY2020. (Venditti, 2021) They operate seven large mines worldwide across 3 countries including 3 domestically, 2 in Canada and 2 in Papa New Guinea of which some are outright owned, and others are a part of joint ventures. (Newmont.com, 2019)
Recently, Newcrest mining’s stock has been an extremely high yield investment, increasing in value by 31% across the past 3 months. (Newcrest, 2022) Factors such as its commitment to using retained earnings to fuel growth alongside effective investments have contributed to a high earnings growth in recent years have all helped the performance of the stock early this year. Their performance on the stock market was a key reason for rejecting the initial bid proposed in January as the Board of Directors have used this growth trajectory as one of the reasons to justify a higher bid. (Yahoo Sports, 2023)
Newmont Corporation Overview
Whilst Newcrest may be large players in the gold mining industry, Newmont are the largest player. They have a world class portfolio of assets across 9 countries in 4 continents and are the only gold producer listed on the S&P 500. The North American firm was founded in 1916 and in the past century has grown into the giants they are through running successful mining operations for resources such as copper, silver, lead, zinc, uranium and most successfully gold alongside operations into developing oil and gas. (Newmont.com, 2019)
Newmont sees the deal as a way to expand and diversify its already highly valuable portfolio, to add profitability to the firm and increase stability. Interestingly, although both firms are known for their gold production and if the deal is completed, they will be by far the largest gold producers, Newmont is particularly interested in the possibility to expand its exposure to copper. The deal has the potential to add almost 50bn lb of copper reserves to Newmont’s Asset Portfolio which is highly desirable due to copper being a critical metal in regard to the ongoing transition to a net zero economy. (Investopedia, 2023) (Newcrest, 2022)
Industry analysis
The global mining market grew from $2.02 trillion in 2022 to $2.15trillion in 2023 at a compound annual growth rate of 6.1%. (Thebusinessresearchcompany.com, 2023) The main driver of growth within the industry is government support. Governments worldwide have been increasing subsidisation in order to encourage foreign direct investment (FDI) within the mining industry. Furthermore, government support for mining has been enhanced through government financing of bilateral development banks and export credit agencies investing in mining support, further investment through majority state-owned mining and utility companies as well as tax exemptions. One example includes the Indian Government's enactment of the Mines and Minerals Amendment Act 2021 and the publicization of the Mineral Conservation and Development rules, that aims to facilitate growth of the mining industry.
Moreover, it is crucial to mention that the use of renewable energy has been crucial in helping mining firms reduce power costs as well as reduce emissions in mines. This comes as a result of solar and wind projects being built in close proximity to mine sites, the cost of connecting to power grids reduces. This has encouraged firms such as BHP and Rio Tinto to begin using renewable energy sources in their mines. According to EY, RioTinto aims to produce 10% of power demand for renewable energy. (Venditti, 2021)
Asia-Pacific was the largest region in the mining market in the year 2022 and remains a hotspot for growth in the mining industry in 2023.
The future looks bright for the industry, particularly as a result of increasing worldwide demand for gold and copper. Demand for gold comes from economic growth that is occurring post COVID-19, as disposable incomes rise and consumers wish to increase their expenditure on luxury golden items, for both personal use and satisfaction, as well as diversification of assets. As for copper, this metal is crucial for renewable energy technology, and as climate change ramps and the world looks to shift towards cleaner energy sources, copper will become crucial.
Source:(Statista, 2022)
Deal Valuation
Using projections from S&P Capital IQ, our DCF implies a share price of $14.06. This is 26.6% below the market share price of $19.15 (21/04/2023). At $32.87 a share, Newmont Mining is willing to pay a control premium of 28%. This high figure demonstrates their long standing, strong intent to acquire Newcrest, for almost 2 years. Furthermore, this offer is 16% more than the initial one made in February 2021 of $16.9 billion.
Deal Rationale and Synergies
Revenue synergies
The acquisition of Newcrest should result in major revenue synergies for Newmont, as the acquisition allows Newcrest to directly access the mining industry in Australia. As mentioned in the industry analysis, demand for gold is expected to rise in the coming years (leading to price rises in gold). Seeing as Newcrest is the largest gold producer in Australia, it is without doubt that this acquisition will vastly improve revenues for Newmont. Overall, this will undoubtedly increase Newmont’s revenues and market share, as Newmont will become the world’s largest gold miner.
Cost Synergies
Cost synergies are likely to occur through optimising the production process, as Newmont can use the best practices of Newcrest and streamline their production process, thus reducing costs and improving efficiency. Furthermore, Newmont can vastly reduce corporate overheads, including salaries, benefits, and administrative costs, leading to reduced overall costs.
Additionally, Newmont may be able to expand their incumbent supply chain, and purchase supplies and mining equipment at lower costs than Newcrest, helping to reduce overall cost of production.
Other synergies
Another synergy that is important to mention is that Newmont will acquire improved expertise and knowledge of the mining scene in Australia and the Asia-Pacific scene (which as mentioned in the Industry Analysis, is the largest growing region in mining). This could give Newmont a clearer indication if Australia is a nation they should further pursue and further establish operations, as they look to increase their worldwide presence and consolidate their place as the number one largest mining firm in the world.
Furthermore, Newmont will have access to Newcrest’s pilot program using x-ray fluorescent equipment, which allows geologists to make better informed decisions about whether to continue drilling in areas of prospective mineralisation. This undoubtedly will aid Newmont in increasing efficiency within their operations, as workers will waste less time in mining areas which are not mineral rich.
Nonetheless, this acquisition will help Newmont diversify their risks, as they spread their operations across multiple sites and countries. Thus, if an economic/geo-political crisis occurs in a certain region that distorts Newmont’s operations, they can at least maintain fluid operations in other parts of the world.
Overall, through the revenue, cost and other synergies mentioned, it seems on the surface that the acquisition of Newcrest Mining by Newmont corporation is one that makes sense for both parties. This is a strategic acquisition which is bound to make both companies more profitable and more efficient within their operations, headlined by technological acquisition and diversification of risks.
Risks
The proposed merger between Newcrest Mining Ltd. and Newmont Corp, valued at just shy of $17.0 billion, carries several risks. A comprehensive analysis of possible scenarios in which the deal could go wrong, including financial risks, operational risks, and regulatory risks is necessary. Identification of any potential deal breakers and their impact on the companies involved and the industry as a whole is also crucial.
One risk is that the merger would not make significant cost savings for the combined entity in the near term, as Newcrest and Newmont sit close to each other in the forecast 2023 gold AISC cost curve. Newmont would still sit on the 69th percentile, at a higher cost than its main competitors, Barrick Gold Corp. and Agnico Eagle Mines Ltd. Additionally, there are legal, regulatory, or market risks that may impact the deal or the company's performance post-acquisition.
Another risk is that the offer implies a 21% premium to Newcrest's Feb. 3 closing price. While the increased reserves and resources and greater exposure to copper are more important, the high premium may make it difficult to achieve the desired financial returns.
The tie-up would bring the two businesses back together after almost 25 years apart, which may create cultural and operational integration risks. Newcrest has a high proportion of low all-in sustaining cost, or AISC, gold and copper mines in the Asia-Pacific region and North America, and a reasonable growth profile, which may make it difficult to integrate with Newmont's existing operations. Furthermore, Papua New Guinea would be a new mining jurisdiction for Newmont, with acquisition of the Lihir and Wafi-Golpu assets. This may pose regulatory and geopolitical risks that could impact the deal's success.
Lastly, the only other company with the firepower to counter the offer would be Barrick Gold, and it has indicated that it will not bid for Newcrest. This lack of competition may reduce the potential benefits of the merger and limit the ability to negotiate better terms for both companies.
Overall, while the merger offers several benefits, including increased reserves and resources and greater exposure to copper, there are several risks that must be considered before proceeding. A thorough analysis of these risks is essential to make an informed decision. (Spglobal.com, 2023)
Conclusion
In conclusion, the acquisition of Newcrest Mining by Newmont Corporation is a strategic move that has significant implications for both companies and the industry. The key findings from the report indicate that this deal would provide Newmont with increased access to gold resources and help the company diversify its portfolio. However, the potential risks and challenges associated with the deal cannot be overlooked, including the integration of two large mining companies and the need for careful management of the newly acquired assets.
Overall, the deal is expected to have a positive impact on the companies involved and the industry as a whole. It would allow Newmont to strengthen its position as one of the world's leading gold producers and potentially increase shareholder value. Considering the benefits and risks associated with the deal, it is recommended that both companies proceed with caution and engage in thorough due diligence before finalizing the acquisition. Furthermore, it is crucial for the companies to establish a clear integration plan and effective communication strategies to ensure a smooth transition. If executed successfully, this deal could be a game-changer for the mining industry, setting a precedent for other mergers and acquisitions in the sector.
References:
Investopedia. (2023). Newmont Boosts Its Offer to Buy Newcrest to $19.5B. [online] Available at: https://www.investopedia.com/newmont-boosts-its-offer-to-buy-newcrest-to-usd19-5b-7404858 [Accessed 26 Apr. 2023].
Newmont.com. (2019). Newmont to Enter into Confirmatory Due Diligence on Newcrest. [online] Available at: https://www.newmont.com/investors/news-release/news-details/2023/Newmont-to-Enter-into-Confirmatory-Due-Diligence-on-Newcrest/default.aspx [Accessed 26 Apr. 2023].
Newcrest. (2022). Asset overview. [online] Available at: https://www.newcrest.com/our-assets/asset-overview [Accessed 26 Apr. 2023].
Newmont.com. (2019). Newmont Corporation - About Us. [online] Available at: https://www.newmont.com/about-us/default.aspx [Accessed 26 Apr. 2023].
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Reuters (2023). Australia’s Newcrest rejects $16.9 bln bid from Newmont. [online] Reuters. Available at: https://www.reuters.com/markets/deals/australias-newcrest-rejects-169-bln-bid-newmont-2023-02-15/ [Accessed 26 Apr. 2023].
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Spglobal.com. (2023). Newmont acquisition of Newcrest would be largest gold merger in history. [online] Available at: https://www.spglobal.com/marketintelligence/en/news-insights/research/newmont-acquisition-of-newcrest-would-be-largest-gold-merger-in-history [Accessed 26 Apr. 2023].
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Venditti, B. (2021). The World’s Top 10 Gold Mining Companies. [online] Elements by Visual Capitalist. Available at: https://elements.visualcapitalist.com/the-worlds-top-10-gold-mining-companies/ [Accessed 26 Apr. 2023].
Yahoo Sports. (2023). Newcrest Mining Limited’s (ASX:NCM) Stock Is Going Strong: Have Financials A Role To Play? [online] Available at: https://uk.sports.yahoo.com/news/newcrest-mining-limiteds-asx-ncm-033155425.html#:~:text=Overall%2C%20we%20feel%20that%20Newcrest,to%20its%20high%20earnings%20growth [Accessed 26 Apr. 2023].