Key Points: 

  • Morningstar recently increased long-term gold price assumption to US$1,700 an ounce, up from US$1,600.
  • We recently reinitiated coverage of the world's largest gold miner Newmont (NEM), which  is in takeover talks with ASX-listed Newcrest (NCM)
  • Newmont is interested in Newcrest because it's of its reserves. If you don't replace the reserves, you don't have a business, and Newcrest has more than two decades of reserves.

Read more on Newmont's takeover offer for Newcrest here, and how investors can determine whether they're getting a good deal.

Transcript: 


Jon Mills: The biggest influence on gold recently has been the Federal Reserve raising interest rates. And given gold doesn't throw off any cash flow, the opportunity cost of holding gold increases in a rising interest rate environment. So, that's why we saw the gold price go from around US$2,000 an ounce to around US$1,600. More recently though, we've had, not really a panic, but a bit of a stress in the US financial system and also in Europe with the likes of Credit Suisse. And so, now, we've seen a bit of, I guess flight back to safe havens, and gold is one of those.

Going forward, I mean, like any commodity, gold is impacted by supply and demand. I mean, we do have these macroeconomic concerns more in the short term, but the longer term, it's like iron ore or coal or what have you. It's based on supply and demand. And the interesting about what's happening in the gold market and in fact, a lot of commodities is, you've got inflation pushing up the cost curves for all the miners. And so, we've recently increased our long-term gold price assumption to US$1,700 an ounce, up from US$1,600 based on the latest cost curve information and where we see supply and demand over the mid cycle, which is five years plus.

So, Newmont, it's the biggest gold miner on earth. It produced around 6 million ounces last year, which is good for about 5% of mine production globally. Compared to Newcrest, it's about 3 times what Newcrest produced last year and what we think it's going to produce this year. It actually did found the predecessor to Newcrest 30, 40 years ago. And so, it's sort of a coming together of old relatives, I would say, if a deal does in fact gets done which we think is highly likely. Newmont has offered 0.4 of its shares for every Newcrest share, plus Newcrest can have the ability to pay a fully franked dividend of up to US$1.10 per share. So, that gets you to around A$32.50 based on a Newmont share price of around US$51.

So, look, we think it's a good deal for Newcrest shareholders. I mean, the Newcrest board has done a good job pushing Newmont to increase its offer, and this is actually its third offer. It's best and final in the instance that there's no competing offer. So, long story short, they're doing exclusive due diligence at the moment, and we think a deal is highly likely to be signed in a month or so.

Newmont is interested in Newcrest because it's essentially buying reserves. So, like any minor, whether it's Newcrest, Newmont, BHP, Rio, you've got to replace the reserves because mines are depleting assets, and if you don't replace the reserves, you don't have a business, or your business is declining. And one of the big attractions of Newcrest is it has more than two decades of reserves, which is more than what Newmont and Barrick and the other major gold miners have. So, that's one major attraction of Newcrest. And I guess the other one is a lot of those reserves are in relatively stable jurisdictions, whether it's Australia, Canada, even their Lihir mine in Papua New Guinea has a long track record of relatively decent production that's currently going through a few issues, but we think that will come back. And so, they are basically two major attractions of Newcrest to Newmont.

So, if Newmont does in fact sign a deal with Newcrest, then you receive shares in Newmont which are going to be listed on the ASX as well. So, you can maintain your equity exposure to the combined entity. It will be obviously named Newmont, but you still have exposure to not only Newcrest current assets, but the 6 million ounces that Newmont currently produces. And you'll also receive a fully franked dividend of up to US$1.10 and so, whatever that is in Australian dollars at current exchange rates.