Gold Mining Consolidates As Newmont Bids On Competitors

Gold miner Newmont Mining Corporation’s recent bid for Australian competitor Newcrest raised interesting questions about mergers in the mining sector. A merger between the two companies would reunite a former subsidiary with its parent company, as Newmont Mining was founded in 1966 as a US mining division of Newcrest.

Today however, the board of Newcrest unanimously rejected the $17 billion (US) takeover offer. Newcrest announced the decision in an ASX release, saying that the offer did not represent sufficient value for Newcrest shareholders. But it seems Newcrest hasn’t entirely slammed the door on the takeover, with the board indicating it is prepared to provide access to limited, non-public information on a non-exclusive and conditional basis.

Such an arrangement, Newcrest said, might determine if Newmont can provide an improved proposal for consideration. The Newcrest board reaffirmed its belief in the company, stating it is uniquely positioned with a portfolio of long-life, top-tier gold and copper assets.

M&A deals in the sector rose in 2023, exceeding 2022's volume of $48.4B by the third quarter, indicating a consolidation trend in the sector, and Newmont’s $17B all-stock bid was no exception.

In September 2021, Newmont's CEO Tom Palmer spoke at the Denver Gold Forum, stating “There is a need for the gold industry to consolidate, in particular regarding ESG Those comments came in the wake of Newmont's acquisition of Goldcorp for $10 billion at a 17% premium – a whole level below the current Newcrest bid of $17 billion at a 21% premium.

There is logic behind those words. Despite recent M&A activity, this sector remains fragmented while the difficulty of mining is increasing from a technological and bureaucratic standpoint.

Since Newmont split from Newcrest in 1990, the company has expanded its operations to Papua New Guinea, Canada, Indonesia, and Peru. Currently, six operating mines are running.

A successful deal would mean a combined production of 8.5 million ounces per year with a market cap exceeding $57 billion.

Still, the market has not reacted favorably, as Newmont dropped 6% on news of the merger. Despite this, there are several positive catalysts for both businesses moving forward.

Some investors may not like Newmont's M&A appetite, sharing the opinion of Barrick Gold's CEO Mark Bristow, who rejected the idea of bidding for Newcrest, stating that: “There is a difference between value mergers and acquisitions, and getting bigger for the sake of getting bigger.“

Newmont has a mature portfolio with an impending growth slowdown post-2025. Given challenges like a $2 billion capex on the new Yanacocha mine in Peru, it is unsurprising Newmont is looking for other assets.

Even so, a successful acquisition might just kick the can down the road. Newcrest comes with projects like Wafi Golpu in Papua New Guinea or Red Chris in Canada, and it could face those challenges more easily when combining its balance sheet with Newmont's and avoiding potential negative cash flow associated with startup expenditures.

Newcrest's principal assets are mature as well. Its large mines, like Telfer in Australia or Lihir, have been around for a long time, and come the 2030s, their combined forces might start facing Newmont's current problem.

Although Newmont has focused on gold for some time, copper might be a dark horse in this equation.

Newcrest has recently grown copper exposure to 25% of its revenues compared to 22% last year. With the renewable energy sector growing quickly, a wider than expected global copper shortage would not be surprising.

Renewable energy systems require 12 times more copper than traditional energy sources. Meanwhile, electric vehicles use two to three times more copper than conventional vehicles.

Whether Newmont's hefty bid pays for itself through Newcrest's copper assets will depend on the pace of green energy adoption around the world. Diversifying their portfolio to other precious metals will ensure resiliency in coming years, but regulators may delay that progress.