Greatland Gold investors are waiting with bated breath for the outcome of Newmont’s bid for Newcrest. I consider the possible implications — and await your considered opinions.
by: Charles Archer
Greatland Gold (LON: GGP) shares have jumped by 15% in five days as investors consider the connotations facing the FTSE mining explorer as US-listed Newmont tenders an offer for its JV partner Newcrest.
I covered Greatland for ShareTalk in November of last year and would encourage readers to review the piece to understand the basic investment case for 2023. There have been few changes since, though notably, the company has kept investors informed with regular Juri and Haverion updates.
For brevity, GGP’s flagship is the world-class Haverion Project in the Paterson region of Western Australia, which is ideally located just 45km from Newcrest’s existing Telfer gold and copper mine. The two companies are planning to develop Haverion using Telfer’s existing infrastructure, including its processing plant, which will significantly reduce the associated capex.
Newcrest has the management of the JV and a 70% interest, with GPP the junior partner at 30%. Haverion’s resource estimate currently stands at a significant 6.5 million ounces of gold equivalent and 218 kilotons of copper, with an 86% conversion of resource to reserve.
Investors are now patiently waiting for the results of the feasibility study which has been ‘extended beyond the December 2022 quarter to allow further time to maximise value and de-risk the project.’
Newcrest takeover bid
In what would constitute the largest takeover offer so far this year, US-listed Newmont has launched an all-share offer for Newcrest, which is now valued at AU$ 22.3 billion. The AU$24 billion offer, a 21% premium to the prior day’s closing price, would create the largest precious metals miner in the world and be the largest mining takeover in Australian corporate history. It would leave the new entity with four of Australia’s largest gold mines and producing almost twice as much gold as the nearest competitor Barrick.
With the gold price at near-record highs and the pace of US interest rate rises likely to fall imminently, the mining sector is undergoing serious consolidation. Copper producer Oz Minerals is being acquired by BHP for $6.4 billion, while Yamana Gold is also being purchased for $4.8 billion by Pan American Silver Corp.
Newcrest shares are up by about 10% since the takeover approach, their highest since May last year. Newmont CEO Tom Palmer believes the deal represents a ‘strong value proposition’ for the two companies, with inflationary costs and the volatile price of gold forcing companies of all sizes to seek out deal-making to get better economies of scale.
Interestingly, Newcrest was originally founded in 1960 as Newmont’s Australian division and was spun off in 1990 after its merger with historical BHP gold assets. It has not yet named a new CEO to replace Sandeep Biswas; either an indicator that a bid may have been in the offing or a perceived weakness to be leapt upon.
Newcrest stated it had already rejected one takeover bid, but Newmont has now offered 0.38 Newmont shares per Newcrest share in a new proposal, a bid increase of 4.7%. This would leave Newmont shareholders controlling 70% of the newly combined company and Newcrest shareholders owning the remaining 30%.
Simon Mawhinney, CIO of Allan Gray — Newcrest’s largest shareholder with 7.4% of shares — thinks the terms are not supportable, arguing that the company is well funded and has highly valued long-life gold reserves. Indeed, he notes that a good litmus test for a reasonably-priced deal is one where both seller and buyer feel somewhat aggrieved by selling out too low or by paying too much. It’s not clear to me that this kind of symmetry exists with these deal terms.’
Morningstar analyst Jon Mills believes that ‘Newcrest is now in play, but if a deal is to be done, it will likely need to be at a higher price…other major gold miners may be interested in Newcrest given the quality of its assets.’ Mills cites a 30% premium as the traditional metric, but it is not clear if Newmont will go this far.
While some speculate that Agnico Eagle could make its own bid, Barrick has ruled itself out of a counterbid for Newcrest. CEO Mark Bristow argues that ‘there is a difference between value merger acquisitions and getting bigger for the sake of getting bigger.’ I interpret this as the Barrick CEO thinking that an improved offer would be overpaying, though a Reuters source has suggested that Newmont is nonetheless open to improving its proposal.
For context, Barrick itself attempted an unsuccessful $18 billion hostile bid for Newmont as recently as 2019, which ended with Newmont acquiring Goldcorp for $10 billion. This is not a simple consolidation, and those commenting have their own agendas.
Multiple analysts argue that a 10% improvement on the current offer would be expected to reflect Newcrest’s growth prospects, though Goldman Sachs analysts consider that an increase over 5% remains unlikely. Importantly, Newmont’s own shares will likely fall to correspond with any increased offer, rendering the increased offer smaller in cash terms.
However, Newmont does have franking tax credits of $440 million, which could be used instead to help sweeten the deal for Australian investors.
One of Newmont’s largest shareholders, Flossbach von Storch, believes the two companies would be synchronistical, but Flossbach investment manager Simon Jager argues that ‘we don’t want to see big premiums paid.’
This leaves the potential takeover in the air — and it’s anybody’s guess where Newcrest would believe a bid acceptable. Furious negotiating is doubtless going on in the background.
Greatland Gold: how it could be affected
Barrenjoey analyst Dan Morgan thinks that Newcrest would be more attractive to buyers if it were to adjust its portfolio by selling its stake in Haverion, Telfer and the associated processing plant as it is currently producing below capacity. In addition, it could dispose of Canadian and Papua New Guinea assets as these assets have some environmental concerns at odds with several institutional investors.
The question is this: who would Newmont sell its 70% stake in Haverion to, and would it accept a small discount on the sale in order to become more appealing as an acquisition proposition?
Starting with the obvious, some argue that Greatland Gold could buy out Newcrest’s share of Haverion to achieve 100% ownership. To figure out whether this is a realistic possibility, it’s necessary to calculate how much Newcrest would value its 70% as — and this figure is not the same as how valuable the gold in the ground actually is.
In August 2022, Newcrest declined to pay $60 million for an additional 5% of the project, rejecting the US$1.2 billion valuation proposed by GGP-ordered independent analysis. Again, for clarity, this was the value of the project in July 2022, not the possible value of the gold that can be mined.
Former Newcrest CEO Sandeep Biswas told investors on an earnings call that buying this additional 5% did not meet its ‘investment hurdles,’ and further argued that ‘the first 70% cost us US$65 million, which is an excellent investment.’
Having claimed that $60 million for 5% was too much a few months ago, it’s reasonable to assume that the top end of Newcrest’s expectations would be at most 70% of $1.2 billion, or $840 million. Given the urgent need to sell the asset, its very cheap buy-in, any legal complications, and the fact that this $840 million would be overvalued by their own standards, this figure could be lower.
However, GGP would also need to purchase Telfer and the processing plant; it only makes strategic sense for Newcrest to sell its stake in Haverion if it offloads Telfer as well. For context, if GGP purchased a 100% interest in Haverion without also purchasing Telfer it would be completely beholden to a third party with no invested interest in developing Haverion. On the other hand, buying up Telfer and its processing plant would make GGP cash generative the very next day, with spare capacity to process other miner’s ore as well.
Newcrest invested $181.4 million in Telfer in 2021 to continue production until the end of 2023. It then invested a further $214 million to extend mine life to 2025 late last year. Telfer hosts the largest gold processing facility in Paterson province, and the project produced 407,550 ounces of gold in 2021-22. It still holds significant value, despite its age.
Of course, as Telfer’s open pit mines come to the end of mine life, it will eventually become uneconomic to run — though this calculation changes when Haverion is factored in.
Regardless of exact calculations, Greatland would likely need to find at least $1 billion for the assets, and currently has a market cap of just $444 million. A share consolidation followed by a huge equity raise, combined with serious additional financing from Wyloo may make this figure achievable — but in reality, this is not a likely outcome in my view.
Newcrest could choose to sell Telfer and its 70% of Haverion to a third party, but this also seems unlikely. Of course, I’m happy to hear the opinions of others.
The second option is that Newcrest could buy out Greatland for its 30% share of Haverion, and then package Haverion, Telfer, and the processing plant as a bundle to be sold on. Under the $1.2 billion valuation, GGP’s share would be worth $360 million, though the company would undoubtedly hold out for far more. While Newcrest was reluctant to pay up for an additional 5%, it could well stump up for full control, to then sell on the assets in order to become more attractive as an acquisition proposition.
Then there’s the possibility that Barrenjoey’s Dan Morgan is wrong — and this is where I stand.
If Newmont increases its bid and Newcrest accepts, then Greatland will suddenly be in partnership with the largest gold producer in the world. There’s a reason why several very senior people are joining now — consider the pedigree of Barnaba, Gaines, Wilson, Meynert, and Tyrrell.
If this new Goliath then wants 100% of Haverion, then we’re off to the races.
And of course, if Newmont chooses to drop its bid, then it’s as we were.
by: Charles Archer
This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investing decisions made using the information provided.
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