Newmont/Newcrest: buffed-up offer may lead to golden handshake

Golden opportunities never come cheap. Newmont, the US-listed mining company, has had to buff up its bid for smaller rival Newcrest to get closer to a deal.

This is Newmont’s third attempt. Its last try in February was scorned on the basis that it undervalued the company. As predicted by Lex, the acquisitive miner has come back with a couple of extra nuggets. Newcrest’s board has accordingly opened its books.

Under the terms of the revised offer Newcrest shareholders would get a slug of cash. This would be a special dividend of $1.10 a share worth almost $1bn in total.

Newcrest investors would also get a bigger share of the combined group. Newmont is offering 0.4 of its own shares for each one they hold, up from 0.38 at the previous attempt. At Friday’s close, that was worth $20.80 a share, for a total of $21.90. 

That looks like an attractive offer. At current exchange rates, Newmont’s cash and stock bid is worth A$32.87 a share, 46.4 per cent more than the undisturbed share price. That values Newcrest at an enterprise value of A$32bn ($21.3bn), almost 10 times this year’s expected ebitda, according to S&P Capital IQ. At least one big shareholder is inclined to accept. 

Newmont will have to sweat Newcrest hard to justify a premium worth some $6bn. A rough calculation suggests Newmont would need to find something like $600mn in annual cost savings to make the numbers stack up.

The takeover would create a golden behemoth, producing 8mn ounces of the yellow metal a year — about twice as much as the next largest producer. But, with mines spread around the globe, scale does not necessarily translate into lower costs.

Australia looks like a promising spot to prospect for cost cutting. Newmont and Newcrest own four out the five largest mines in the region. Newcrest is headquartered there and has some $120mn in corporate costs, according to Jeffries. Gold is sometimes extracted using acid. That point will not be lost on anxious employees.