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Should you bet on Newmont raising its bid for Newcrest Mining?

On 16 February this year, the board of Newcrest Mining rejected the $25 billion bid by America’s Newmont. However, the board has continued discussions with Newmont for over a month. Is a new bid on the way?

Gold mine Source: Bloomberg

Newmont’s bid for Newcrest Mining of USD17.1 billion (AUD24 billion) consisted of 0.38 Newmont shares for each Newcrest share indicating a value at the time of around AUD32 per share. This was a premium to its share price at the time, but well below its 2019 and 2020 highs. With Newmont’s shares falling as much as 20% in February, the offer appeared even less attractive.

The board of Newcrest took ten days to reject the bid, suggesting that they may have seen some merit in the offer. Moreover, the board announced that it would provide limited non-public information to Newmont.

A month later on 5 March, the Australian Financial Review reported that the two companies had agreed to terms for a round of early-stage takeover talks. These could culminate in a higher takeover bid, or Newmont could simply walk away. However…

A new offer is likely

According to Newmont CEO Tom Palmer, ‘there’s never been a better time for Newmont and Newcrest to come together,’ adding that the combination would create ‘an ideal mix of gold and copper, strengthening Newmont’s overall position.’

Copper and silver are commonly found with gold, so the sales of silver and copper offset the costs of producing the gold. However, with an increase in copper demand from converting to electric cars and from grid-stabilising batteries, the price of copper more than doubled since January 2016, hitting a record USD4.75/lb in March 2022. According to a February report by McKinsey & Company, the world will be facing a shortage of 6.5 million tonnes of copper by 2031 unless supply increases by 20%.

Without finding that extra 20%, copper prices may hit more records in the coming years. This makes Newcrest’s expected 2023 production of 155,000 tonnes of copper increasingly attractive. Specifically, at USD4/lb, that’s USD1.37 billion in revenue – and could increase further if a shortage develops, as suggested in the McKinsey report.

Newcrest’s attractive gold/copper portfolio, plus the fact that the two companies have been discussing the merger for over a month, suggests that an offer could be forthcoming.

How high could any offer be?

The board of directors is supposed to act in the best interest of shareholders. This means accepting takeover offers that are higher than the share price is likely to reach.

Given that Newcrest’s share price hit $37 in 2019 and $35 in 2020, it would be a courageous board to accept offers below $35. The scrip offer that the board rejected valued Newcrest’s shares at around $28.6. Any subsequent offer would likely be higher than this.

It appears the market may expect something to happen as well, given that the share price has been on a tear this month, rising from $23.1 on 1 March to $26.0 on 24 March.

There could be an upside even without a takeover

Copper isn’t the only metal that appears to have a bright future. Newcrest’s main product, gold, could make significant gains this year:

  • The US 10-year treasury yield, which rose through February appears to have peaked on 3 March. Gold prices often have an inverse relationship to the 10-year note yield.
  • Central banks appear to be loading up on gold.
  • There are widespread expectations that central banks will pause interest rate hikes in mid-2023 and even begin lowering rates in 2024.

How to trade Newcrest shares

The simplest way to trade Newcrest shares is to open a share trading account and simply buy the shares. Shares can also be purchased on margin, which offers leverage but increases downside risk.

Trading options and CFDs also offer leveraged exposure to shares with increased risk. Options and CFDs can also be used to bet on share prices falling.

Take your position on over 13,000 local and international shares via CFDs or share trading – all at your fingertips on our award-winning platform.* Learn more about share CFDs or shares trading with us, or open an account to get started today.

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This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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