Having lost more than half its market value since mid-April, Australia’s Newcrest Mining is looking like a target for a takeover bargain.
Although the price of gold has been sliding, Newcrest’s 40 years of reserves are thought to make it an attractive target to to a number of suitors in spite of recent writedowns and concerns over regulatory disclosures.
Melbourne-based Newcrest said last month that it plans to reduce the value of four mines in Australia, Côte d’Ivoire and Papua New Guinea by A$6bn ($5.6bn), which is about a quarter of the company’s book value on December 31. The company, now with a $6.6bn market value, also says it is planning to cut exploration costs to generate free cash flow.
“It’s so cheap, it is a potential acquisition target,” Michael Evans, a CIMB Group Holdings analyst says of Newcrest. “It does have very big, great-quality, long-life assets.” CIMB forecasts gold falling 28% through to 2016, but says Newcrest deserves a market value that is double its present level.
Newcrest shares rose as much as 3.6% on Wednesday last week and ended up 0.1% at A$9.31 apiece, their first gain since 14 June. Even so, Michael Evans says Newcrest shares are worth A$20.40 each, or A$15.6bn in aggregate
A takeover premium of 30% above the company’s present stock price would be “not unreasonable,” Evans says. “Global gold majors would like the jurisdictions generally in which Newcrest operates,” Mr Evans says. “I would not be surprised if a Chinese company looked to something like Newcrest as a great longer-term investment.”
Zijin Mining, China’s biggest gold miner by market value, said last week it is considering a bid for the Australian assets of Barrick Gold.
The falling gold price, writedown and scrutiny of its disclosure by Australia’s stock market regulator have pushed Newcrest shares down 52% in less than three months — the most among precious metals mining companies with market values higher than $1bn, data compiled by Bloomberg show.
Newmont, the largest gold producer in the US, and AngloGold Ashanti, the world’s third-biggest producer, are among suitors that may be drawn by Newcrest’s vast reserves, Sydney-based Morningstar analyst Mathew Hodge says.
“The big guys have really struggled to find enough ounces every year just to keep producing at the level they’re at,” he added.
However both Newmont and AngloGold spokespeople declined to comment on the speculations.
Despite these speculations, the reality is that the world’s largest mining companies have recently been more focused on cutting costs and selling assets, instead of pursuing new deals and takeovers.
In addition, regulatory scrutiny over the timing of Newcrest’s write-down disclosure may also slow down any potential bidder. The disclosure of the expected charge on 7 June is facing scrutiny from regulators over possible selective briefing of analysts. In the three days before the 7 June announcement, Credit Suisse, Citigroup and UBS cut their Newcrest ratings.
Last week on 25 June, the company announced that it had appointed former Australian Securities Exchange chairman Maurice Newman to review its disclosure and investor relations practices.
Newcrest Chairman, Don Mercer, said the Newcrest Board was deeply concerned about the criticism of the Company, as reported in the media, regarding its interaction with the market and disclosure prior to the Company’s market release on 7 June this year;
“Newcrest takes its disclosure obligations extremely seriously. Whilst the Board is already reviewing events leading up to 7 June, we have decided to obtain an independent perspective,” Mercer said.
Peter Esho, an adviser at Wilson HTM Investment outlined the two main issues facing Newcrest right now;
“There are governance issues and there are balance-sheet issues,” he says. “I don’t think it’s expensive, but those two issues are serious. You really need a medium-term horizon on this.”
Of course there is also another scenario. Nouriel Roubini, professor of economics and international business at New York University, is also known as Dr. Doom for predicting turmoil before the global financial crisis began in 2008. He says gold may drop to $1,000 an ounce by 2015.
The world’s other large producers such as Barrick Gold Corp., Newmont Mining Corp. and Gold Fields Ltd. may all be at risk of taking writedowns like Newcrest’s.
It seems likely that a storm of writedowns is coming from the gold mining industry, according to several analysts but all of the major players have so far declined to comment on potential writedowns.
“We would expect that there would be several, if not many companies, who would also in the next reporting period be coming to a list of impairments,” says Michael Elliott, of Ernst & Young LLP’s global mining practice. “It’s just a question of timing, and who had the largest exposures.”