The Pangea Advisors Blog: June 2013

Private-equity firms [have raised] almost $9 billion in 16 months for mining investments, more than the previous four years combined, data compiled by Bloomberg show

Newcrest Is So Cheap Even Gold Bears See Deal: Real M&A - Bloomberg
Even gold bears say Newcrest Mining Ltd. (NCM) has become a takeover bargain.

Newcrest has lost more than half its market value since mid-April, more than any major precious-metals mining company, as gold heads for its steepest quarterly decline in almost a century, according to data compiled by Bloomberg. Still, with its 40 years of gold reserves exceeding that of any global peer, Australia’s largest producer may be a target for Newmont Mining Corp. (NEM) (NEM), said Morningstar Inc.

The drop prompted Newcrest to say June 7 it expects to write down the value of four mines in Australia, Ivory Coast and Papua New Guinea by as much as A$6 billion ($5.6 billion), which is about a quarter of the company’s book value on Dec. 31. Photographer: Carla Gottgens/Bloomberg

Memory sticks in the likeness of gold bars are displayed at Newmont Mining Corp.'s Boddington Gold mine in Western Australia. Newcrest Mining Ltd. may be a takeover bargain for Newmont Mining, said Morningstar Inc. Photographer: Carla Gottgens/Bloomberg

With bullion slumping into a bear market, Melbourne-based Newcrest said this month it plans to reduce the value of mines by as much as $5.6 billion. The company, now with a $6.6 billion market value, also said it’s planning to cut exploration costs to generate free cash flow as early as next year. Even though CIMB Group Holdings Bhd. sees gold falling 28 percent through 2016, the firm says Newcrest deserves a market value that’s double the current level.

“It’s so cheap it is a potential acquisition target,” Michael Evans, a Sydney-based analyst at CIMB, said in a phone interview. “It does have very big, great quality, long-life assets.”

Gold for immediate delivery has declined 20 percent since March and is set for its worst quarterly performance since 1920, according to data compiled by Bloomberg. Before 1968 the price of gold was pegged at $35 an ounce. After more than doubling from the end of 2008 to a record $1,921.15 an ounce in September 2011, the metal is now trading near $1,249 an ounce.
Stock Decline

The drop prompted Newcrest to say June 7 it expects to write down the value of four mines in Australia, Ivory Coast and Papua New Guinea by as much as A$6 billion ($5.6 billion), which is about a quarter of the company’s book value on Dec. 31.

The falling gold price, writedown and scrutiny of its disclosure by Australia’s stock-market regulator have pushed Newcrest shares down 52 percent in less than three months, the most among precious metals mining companies with market values higher than $1 billion, data compiled by Bloomberg show.

The shares rose as much as 3.6 percent today and ended up 0.1 percent at A$9.31 apiece, their first gain since June 14.

Newcrest now may have turned into a target, according to Stephen Gorenstein, a Melbourne-based analyst at Bank of America Corp. With an enterprise value of 253 times the amount of gold in its reserves, Newcrest’s multiple is less than half the median fetched by peers, the data show.
Bargain Hunters

Newcrest’s Cadia Valley mines, west of Sydney, and the Lihir project in Papua New Guinea are the main attractions for a buyer, Gorenstein said in a June 7 report. Cadia and Lihir already account for more than half the gold production at Newcrest, which began in 1966 as an Australian division of Newmont.

Newcrest “may well come up on the radar screens of corporates looking for a bargain,” he wrote.

Kerrina Watson, a spokeswoman for Newcrest, didn’t respond to a phone call or e-mail seeking comment.

With total ore reserves of 87.3 million ounces of gold and 12.1 million tons of copper at the end of December, the gold alone will last about four decades at Newcrest’s current rate of production.

Newmont, the largest gold producer in the U.S., and AngloGold Ashanti Ltd. (AU), the world’s third-biggest producer, are among suitors that may be drawn by the reserves, said Mathew Hodge, a Sydney-based analyst at Morningstar.

“The big guys have really struggled to find enough ounces every year just to keep producing at the level they’re at,” said Hodge, who forecasts a long-term gold price of A$1,200 ($1,111) an ounce -- about 11 percent below its current level.
Takeover Premium

Omar Jabara, a spokesman for Newmont, said the company doesn’t comment on speculation. Alan Fine, a spokesman for AngloGold, also declined to comment.

Evans, the CIMB analyst in Sydney, expects gold to fetch just $1,181 an ounce in 2016, down from $1,638 this year. Even so, he says Newcrest shares are worth A$20.40 (NCM) each, or A$15.6 billion in aggregate. A takeover premium of 30 percent above the current stock price would be “not unreasonable,” he said. The Cadia and Lihir assets alone account for about 86 percent of his total valuation.

“Global gold majors would like the jurisdictions generally in which Newcrest operates,” Evans said in a phone interview. “I would not be surprised if a Chinese company looked to something like Newcrest as a great longer-term investment.”

Zijin Mining Group Co. (2899), China’s biggest gold miner by market value, said last week it’s considering a bid for the Australian assets of Barrick Gold Corp.
Private Equity

Private-equity firms are also preparing to buy, raising almost $9 billion in 16 months for mining investments, more than the previous four years combined, data compiled by Bloomberg show.

Still, the world’s largest mining companies have been focused on cutting costs and selling assets, instead of pursuing deals. Jamie Sokalsky, who became chief executive officer of Barrick this month, said he’s considering shrinking the Toronto-based company to focus on returns rather than production volumes.

Kinross Gold Corp. said it’s focused on improving existing mines and curbing operating expenses.

Regulatory scrutiny over the timing of Newcrest’s writedown disclosure may also slow down any potential bidder.

In the three days before the June 7 announcement, Credit Suisse Group AG, Citigroup Inc. and UBS AG cut their Newcrest ratings. The company yesterday named former Australian Securities Exchange Chairman Maurice Newman to review its disclosure and investor relations practices.
Reducing Costs

Investors are also concerned that Newcrest will have to raise equity, Peter Esho, a Sydney-based adviser at Wilson HTM Investment Group, said in a phone interview.

“There’s governance issues and there’s balance-sheet issues,” said Esho. “I don’t think it’s expensive, but those two issues are serious. You really need a medium-term horizon on this.”

Still, with CEO Greg Robinson reducing costs, Cadia and Lihir will be churning out gold at less expense as they increase production over the next five years, said Vincent Pisani, an analyst at Shaw Stockbroking Ltd. in Melbourne. Total costs for the group may fall as much as 14 percent in the next two years, Pisani said.

“In terms of having good projects, what’s remaining there will be cheap,” he said in a phone interview.

To contact the reporters on this story: David Stringer in Melbourne at dstringer3@bloomberg.net; Angus Whitley in Sydney at awhitley1@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net; Andrew Hobbs at ahobbs4@bloomberg.net

Newcrest Is So Cheap Even Gold Bears See Deal: Real M&A - Bloomberg