The world’s top gold miner this week launched the largest takeover the sector has ever seen with a familiar refrain: Trust us.
Trust an industry with a track record for serial value destruction from acquisitions? Trust a management team that’s still got indigestion from its last major purchase? Trust a widely disproven theory that when it comes to mining, bigger is always better? Newmont Corp. NGT-T has a steep hill to climb as chief executive Tom Palmer attempts to win support for a US$16.9-billion bid for Melbourne-based Newcrest Mining Ltd. NCM-T, the world’s fourth-largest gold producer.
Mining CEOs have long maintained that the industry features too many mid-tier players and needs to consolidate. Newmont’s greatest takeover – announced on Monday after news of the offer leaked over the weekend in Australian media – will show if investors support this view and are still willing to shoulder the risks that come with M&A-based growth strategies.
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Resistance to deal-making can be summed up in a presentation that hedge fund Paulson & Co. gave five years ago at the Denver Gold Forum. The fund manager put mining CEOs on notice by highlighting the damage done by misguided acquisitions, including Newmont’s previous takeovers. Paulson used the phrase “serial value destruction” to sum up a deal-making spree that led to US$85-billion in writedowns, while mining executives took home US$550-million in compensation.
In recent years, investors have reacted poorly to mining takeovers pitched at a premium to the stock price of the target company. That was the case for Newmont on Monday, as Mr. Palmer announced an all-stock offer he billed as a “powerful value proposition” priced at a 21-per-cent premium where Newcrest stock was trading. The potential buyer’s share price promptly dropped by more than 4 per cent.
Newmont faces a litany of challenges in trying to sell this deal. Operational synergies between the two companies are limited – their mines are scattered around the world. Denver-based Newmont would be making its first foray into a jurisdiction with thorny permitting problems: Papua New Guinea. The PNG government is demanding a significant slice of future gold production from a proposed US$5-billion mine that is 50 per cent owned by Newcrest.
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Newmont’s last major takeover, the US$10-billion purchase of Goldcorp Inc. in 2019, faces “longstanding integration challenges,” analyst Josh Wolfson at RBC Capital Markets said in a report Monday. Newmont now needs to clearly communicate the risks that come with buying an even larger rival, he added.
In defending past takeovers, mining CEOs argued that being the largest player in the sector increased their appeal to institutional investors and boosted the company’s valuation. Their logic was that fund managers only want to own one or two gold stocks, and they want those holdings to be in large, liquid stocks.
Experience has shown fund managers are more discerning: They are willing to do the work needed to find miners positioned to outperform peers. Barrick Gold Corp. CEO Mark Bristow riffed on this theme Monday in responding to a Bloomberg reporter’s question about the Newmont deal. He ruled out a competing bid for Newcrest: “There’s a difference between value merger acquisitions and getting bigger for the sake of getting bigger.”
If Newmont does win the day (Newcrest’s board is currently considering the offer), Mr. Palmer will be out in front of investors, highlighting the potential of new mines in Australia, Canada, Ecuador and Papua New Guinea. He’ll talk up advances in technology such as block cave mining, an approach pioneered by Newcrest to dramatically cut costs on underground projects.
Mr. Palmer will need to make a compelling pitch. What Paulson & Co. described five years ago as “dreadful” performance from takeovers continues to shape investors’ views of deal-making in the mining industry.
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