Boosting copper exposure, mine longevity at heart of Newmont's bid for Newcrest

Underlying Newmont Corp.'s sweetened takeover bid for Newcrest Mining Ltd. is the target's far larger copper position and mine longevity as forecasts point to supply shortages for the red metal.

Newcrest said Feb. 6 that it is considering the terms of Newmont's new $17 billion offer, or 0.380 Newmont share for each Newcrest share, lodged after a rejected offer that valued each Newcrest share at 0.363 Newmont share.

"Whilst not immediately clear, a move into copper production could be a longer-term tactical move to secure reserves ahead of the projected deficit in 2025-2026," S&P Global Commodity Insights Associate Research Analyst Katherine Matthews said in an email interview.

"The copper and the long mine lives are what Newmont wants," Haywood Securities mining analyst Kerry Smith said.

Decades of projects

Newmont's producing copper assets include Boddington in Western Australia, Phoenix in Nevada and Yanacocha in Peru, which was recently acquired from Compañía de Minas Buenaventura SAA and Sumitomo Corp. Newcrest, meanwhile, has copper at its operating gold-copper mines: Cadia in New South Wales, Australia; Telfer in Western Australia; and Red Chris in British Columbia.

Newcrest's swathe of "extremely long-life, long-dated assets" — despite being capital intensive — would give Newmont "lots of projects to sink its teeth into" and set it up for decades, said Daniel Morgan, founding principal and mining equity analyst for financial advisory Barrenjoey.

"Cadia is going to be mining until the 2050s or 2060s; Lihir [in Papua New Guinea] to the 2040s; Red Chris, the 2060s; and Wafi-Golpu could be at least 25 years," Morgan said.

Copper's cost benefits

Newmont and Newcrest produced a combined 5.98 million ounces of gold in January-September 2022, according to the most recent S&P Global Market Intelligence data.

The proposed merger would more than quadruple Newmont's copper production, based on January-September 2022 figures. The bulk of the increase would come from Newcrest's Cadia, which is guided to produce 95,000 tonnes to 115,000 tonnes in fiscal 2023, or more than 70% of Newcrest's total copper guidance.

With miners struggling with high labor and energy costs, having Newcrest's copper assets would cut the merged company's all-in sustaining costs to under $1,000 per gold ounce by 2025, according to a Feb. 6 Scotiabank note.

Cadia effectively gets more "copper rich" as it ages, said Trent Allen, a metals and mining research analyst at CLSA. Cadia's copper would hold up better than gold as the mine transitions to lower gold grade ore over time, and copper is widespread in such porphyry deposits, so the asset's relative value increases.

Aggressive approach to growth

Newcrest would also bring block-caving expertise that could unlock some of Newmont's assets, said Joe Mazumdar, an analyst with Exploration Insights, and formerly Newmont's director of strategic planning and corporate development from 2006 to 2009.

"If you're going to be active in copper, you're going to need to have block caving in your toolkit in the next 20 years," said Barrenjoey's Morgan.

"Some of the easiest ore bodies have already been mined, so the ones that are left are lower grade or deeper, for which block caving is designed," Morgan said in an interview. "Newcrest has been particularly innovative in making Cadia cheaper and faster to develop as a block-caving operation."

While Newmont's move may have surprised some given its recent "generally conservative approach to growth," there were "hints of a more aggressive approach coming" in its December 2022 investor meetings, where it "highlighted the importance of size to increase relevance to generalist investors — a group which already often holds Newmont for gold exposure — and in indices," BMO Capital Markets said in a Feb. 5 note.

Newmont's bid also reflects how hard it is to "make a major scale discovery, then mine it. It's often easier to buy than to build, and that's getting even more true," CLSA's Allen said.

Newcrest was originally formed in 1990 by combining Newmont's Australia business with BHP Gold, just before Newcrest discovered the Cadia Valley porphyries in 1992. Thus "an all-scrip bid by the original parent has an air of inevitability," CLSA said in a Feb. 7 note.

"Newmont is the obvious merger partner," Allen said. "It's like Newcrest moving home with the parents."

Newcrest and Newmont declined to comment for this story.

S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.