This week: ASX v Wall Street
FYTD: ASX v Wall Street
Newcrest Mining, one of the world’s largest gold mining companies, has been a core holding in our client portfolios for several years. It has amongst the highest quality and longest mine-life gold assets in the world.
The bid from Newmont
Having originally approached Newcrest’s board in Feb 2023 and been rebuffed, Newmont, the US-headquartered and world’s largest gold producer, made an improved, all stock bid in April; 0.4 Newmont shares for every Newcrest share. This valued Newcrest at US$19.5bn or ~A$30bn. By mid-May, 5 weeks later, Newcrest directors had accepted the offer. The stock is also expected to pay a US$1.10 per share fully-franked dividend to shareholders before the deal is consummated, with ratification of this by Newmont in the past week.
The takeover is currently awaiting final regulatory approvals, with the deal expected to be completed by the end of 4Q23. Newcrest stock will become Newmont via a Chess Depositary Instrument (CDI)*.
*CDIs are instruments traded on the Australian Stock Exchange (ASX) that allow non-Australian companies to list their shares on the exchange and use the exchange’s settlement systems.
Why we have held Newcrest
The rationale for our position has always been three-fold:
- general exposure to the gold price, which benefits from the global increase in money supply
- exposure to very long-life assets (many years of ore already discovered) rather than mines with shorter lifespan
- portfolio benefits: the defensive characteristics of gold stocks in periods of market turmoil can be very valuable
But should we continue to own?
As portfolio managers, we have a decision to make as the Newmont proposal includes a plan to retain a dual listing of the enlarged Newmont, inclusive of Newcrest, on the ASX.
On the negative side of the ledger,
- The stock will no longer have the ASX as its primary exchange and source of liquidity.
- The stock previously had a fully-franked dividend, but now a majority of group assets will be located outside of Australia, meaning even 50% franking may be difficult to achieve without a restructuring of the Group.
- There is some potential for the stock’s weighting in the S&P Index to fall from the ASX20 into the ASX50.
However, we document below our thoughts on why we intend to maintain a shareholding in Newmont.
- Maintaining exposure to Gold
- Newmont – one of the best positioned gold companies in the world
1. Maintaining Gold exposure – drivers for investment demand
In short, there are two main drivers for holding gold in an investment portfolio: inflation and risk. i.e., gold generally does well when buyers are worried about inflation prospects, debt monetisation and the debasement of national currencies, and also does well in an environment of heightened volatility and fear about the global economy.
Gold and the re-inflation/money supply trade
We have seen gold prices rise during a period where the US is trying to reflate its own economy. As the US authorities try to re-inflate by quantitative easing (QE), capital flows out of the US into emerging economies; where local central banks print more money to buy those dollars, which leads to increase in FX reserves. As reserves rise, this induces interest in buying gold for reserves to balance out too much of dollar exposure in the reserves.
The growth in credit ultimately also leads to high wage growth and an increase in people’s general wealth. Rising wealth and incomes in emerging markets also generate interest in gold in these markets as people look to hedge against the threat of potential inflation.
At times, gold tends to behave like a risk asset, because at the same time that this process is occurring commodity prices tend to rise; and so do risk assets such as emerging market equities.
Investing in Gold Equities
Gold equities offer exposure to gold’s unique characteristics but also bring additional risks such as operational, political, growth, management risk/reward. Conversely, they also offer exploration optionality and higher leverage within the company balance sheet.
While gold is sometimes characterised as an inflation-hedge as well as being a little counter-cyclical to equity markets (safe haven), neither of these characteristics has really been apparent in the recent equity market pull back over the past quarter.
We do not hold physical gold, or a near gold derivative, in client portfolios. We do however choose to maintain a suitable level of gold exposure for clients within our investment portfolios via direct equity holdings in gold producers. Accordingly, we wish to hold exposures with high grade deposits, long mine lives and with ample liquidity.. Accordingly, Newmont looms as an excellent example on each of these measures.
2. Newmont – one of the best positioned gold companies in the world
The combined Newmont and Newcrest Mining should enhance the capability of each business.
While it has high-quality gold assets, Newcrest has historically had disappointing management performance and execution. By contrast, we believe that Newmont will be an improved custodian of the suite of Newcrest mining assets.
Improved scale of production
The addition of Newcrest’s assets will extend Newmont’s advantage as the leading producer of gold, delivering annual production capacity of up to 2x its nearest global competitor.
Global gold mining production rank 2022
Newmont’s efforts will be concentrated within its portfolio over 10 core ‘Tier 1’ assets spread across the world.
Gold portfolio amongst the highest quality in the world
Source: Company reports
And with such a large portfolio of mining assets, under the stewardship of the Newmont executive team, we expect significant synergies to emerge, with improved returns for shareholders as a result.
Material expected merger cost synergies… with a track record of exceeding plans
Newcrest identified synergies
…with a track record of exceeding plans
Goldcorp acquisitions (2019)
Source: Company reports
Improved resource duration and cashflow profile
The combination with Newcrest will also increase the average mine-life for Newmont, enhancing the strong near-term cash flow generation and delivering a stronger medium-term cashflow profile for the entity.
Average mine life (reserves base/annual production) extends and improves cashflow profile
Source: Barrenjoey estimates
While offering good value for shareholders
In combination, the consolidated company represents good value on an Enterprise Value (Market Cap less Net Debt)/Gold Resource basis by global standards.
EV/Gold Resource (A$bnoz)
We continue to seek a majority of our Australian equity exposures to well-managed, high-quality, liquid stocks for client portfolios where there is valuation support/appeal.
A part of our client equity portfolios will also remain exposed to gold as a commodity.
The ‘new’ Newmont appeals to us as a well-managed, world-class portfolio of gold assets with sufficient liquidity in the stock to be able to enhance our ability to drive superior investment returns.