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

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.

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