Takeover bid undervalues Newcrest: Morningstar

An ‘opportunistic’ takeover bid for Newcrest Mining (NCM) is unlikely to proceed but signals the gold miner is now in play, according to Morningstar equity analyst Jon Mills.

No-moat Newcrest on Monday confirmed it had received a conditional and non-binding indicative proposal from the world’s largest gold miner, Newmont Corp (NEM).

Under the offer, shareholders would receive 0.38 Newmont shares for each Newcrest share they own, with Newmont also listing its shares on the ASX.

That values each Newcrest share at about AUD $27.45, which Mills says is around 13% below Morningstar’s fair value estimate of $31 per share.

“We think the offer undervalues Newcrest and is unlikely to succeed given its terms are favourable to Newmont,” Mills says.

“In our view, Newmont’s bid is opportunistic given the recent departure of former Newcrest CEO Sandeep Biswas along with ongoing operational issues including at its Lihir and Brucejack mines, which we think are likely to resolve.”

He says Newmont is also taking advantage of the strong US dollar, which makes gold less attractive.

“We think Newcrest is now in play, but if a deal is to be done, it will likely need to be at a higher price,” Mills says.

Other miners could enter the fray, Mills says, given the quality of Newcrest’s assets.

“However, it is possible that no deal occurs and Newcrest remains a stand-alone company,” he adds.

Shares in Newcrest surged nearly 10% on news of the takeover bid.

Low costs, strong development pipeline

Newcrest was named on Morningstar’s list of top stock ideas for 2023, which identified high-quality businesses trading below value.

The company owns gold and copper mines in Australia, Papua New Guinea, Canada, and its minority-owned mines in Ecuador. Around 80% of its estimated midcycle revenue is from gold with most of the remainder from copper.

Mills says investor concerns around rising interest rates, and an underappreciation of Newcrest’s ‘substantial development pipeline’ had weighed on the share price.

"Despite near-term production issues, we think the company is generally well managed and importantly owns attractive assets," Mills says.

"Newcrest is bedding down its acquisition of Canadian gold mine Brucejack, and we think production will likely rise at its Lihir and Cadia mines."

The low-cost producer is also set to benefit from increased copper production over the next decade, he adds.

Newmont's offer is subject to due diligence, Newcrest granting Newmont exclusivity, Newcrest shareholder approval and other conditions.