Australian Financial Review

Like the aspiring Australian actors who spend years waiting tables in Los Angeles while searching for their big break, Australian gold miners have historically had to press the flesh in Toronto and New York for a while before winning the international recognition they deserve.

The biggest fish in the Australian gold pond, Newcrest Mining, has packed its suitcase and tried to crack the North American market a few times in its 28-year history. But it has never been more than a support act to industry giants like Newmont and Barrick.

The creation in 2012 of a secondary listing for Newcrest shares in Toronto lasted just 17 months before being cancelled like an unloved sitcom.

Five years since that delisting, Newcrest has made progress on some of its bigger issues, most notably the reliability of the processing equipment at the Lihir mine in Papua New Guinea, and, under the direction of chief executive Sandeep Biswas, the company has launched a renewed tilt at the North American market in recent times.

The push has been motivated by a belief the company is not being valued as highly on the ASX as it would be if listed in Toronto or New York.

Advertisement

To illustrate his point, Mr Biswas has often pointed to the fact that North American analysts apply a discount of 5 per cent to the future cashflows of gold miners, while many Australian peers apply a 10 per cent discount.

“That methodology penalises people with long-term mine lives like we do, so in America when you deal with a 5 per cent discount rate it delivers a higher valuation than if you use 10 per cent,” said Mr Biswas, in an interview with The Australian Financial Review in November 2016.

While many large Australian gold miners have barely three to four years of official mine life, Newcrest has close to 30 years assuming recent production rates are maintained.

Newcrest’s mine plan schedules for both Lihir the Cadia mine in New South Wales push beyond 2050.

Barrick and Randgold have put multi-billion dollar, trans-hemisphere gold mergers back on the agenda.
Barrick and Randgold have put multi-billion dollar, trans-hemisphere gold mergers back on the agenda. RNC Minerals

“I think there is some merit to that [argument],” said UBS analyst Dan Morgan, in reference to Newcrest’s belief that its long mine lives were not being adequately valued by Australian investors.

But having already tried to get North American audiences interested, why would Newcrest’s latest assault on the world’s deepest pool of funds be any more successful?

And is there something different the company could try?

Wanted: A big deal

Under the direction of Biswas, the company has launched a renewed tilt at the North American market in recent times.
Under the direction of Biswas, the company has launched a renewed tilt at the North American market in recent times. Jesse Marlow

“To successfully do a dual-listing, you generally need to do a deal,” said Mr Morgan.

“So maybe consolidation – with Newcrest involved – might make sense for them, to pair up with someone with a [Toronto Stock Exchange] listing and from the get-go you have liquidity, you can have market focus and you can have a better chance of a successful listing.

“That may be a pathway for them to go forward.”

The notion of a massive cross-hemisphere gold merger is timely given last month’s revelation that Barrick Gold and Randgold will merge to create the world’s biggest gold miner worth $US19.4 billion ($27.4 billion).

The Barrick and Randgold transaction is essentially a marriage of western and eastern hemispheres.

While Barrick has stakes in a couple of mines in Australasia and a presence in Africa, the vast majority of its gold and profits come from the Americas, particularly the US state of Nevada.

Randgold’s circadian rhythm is, on the other hand, set to Greenwich Mean Time. Its London listing supports a company with five gold mines across the African nations of Mali, Cote D’Ivoire and the Democratic Republic of Congo.

Should any North American gold miner want to find a dance partner in the Southern Hemisphere, Newcrest looms as the obvious choice with its Australian listing and its mines in Australia, Papua New Guinea, Fiji and Indonesia.

Newcrest a target?

If Newcrest is to be involved in a combination with one of its big peers, Shaw and Partners analyst Peter O’Connor hopes the Melbourne-based miner is not the aggressor.

“Newcrest is more of a target than an acquirer,” he said.

With Barrick already shacked up, Goldcorp and Newmont loom as the obvious Northern Hemisphere partners for Newcrest, and many gold industry pundits reckon a friendly “merger of equals” would be the most likely route if a deal were to occur.

If geographic diversification were the motivating factor for a deal, then a pairing of Newcrest and Goldcorp makes more sense than Newcrest and Newmont, which effectively created Newcrest in 1990 when it merged some of its Australian assets with BHP’s gold assets.

Where Newmont already has large, lucrative mines in Australia and a genuinely global portfolio of assets, Goldcorp is confined to the Americas.

It has one quality mine in Argentina, but everything else of note is north of the equator in Canada, Mexico and the Dominican Republic.

A combination of Goldcorp and Newcrest would deliver a portfolio not unlike Newmont’s.

While Newmont is clearly bigger than both Goldcorp and Newcrest in just about every way, the latter two companies are well matched on many levels.

Their annual earnings before interest and tax, depreciation and amortisation (EBITDA) are roughly on par with each other.

Newcrest is superior in terms of mine life and cost of production, but not by much, and Goldcorp arguably has an edge in terms of better development assets.

A similar partner

The two companies market capitalisations have also been relatively similar in recent times; at $US10.5 billion, Newcrest was bigger than Goldcorp ($US9 billion) last week, but it must be noted that Goldcorp shares have fallen 27 per cent over the past three months, while Newcrest shares have fallen by just 13 per cent over the same period.

Goldcorp shares have halved since July 2016, while Newcrest shares have declined by only 27 per cent over the same period, suggesting Newcrest’s bigger market capitalisation may be just a moment in time.

For the record, Newcrest declined to comment in recent days when asked if it was in merger talks with a rival gold miner.

Mr O’Connor cringes at the notion of geographic diversification driving a mega-merger, saying the lure of becoming a “truly global” gold miner is based on hubris.

“What does ‘going global’ actually do? People think if you go global and list elsewhere you will have more exposure and more access to capital markets, it is often complete bollocks,” he said.

“You should aim to have high return on capital, high return on equity, work your capital really hard and maximise your returns to shareholders.”

While diversifying risk across a larger number of mines makes sense for companies with a single asset, Mr O’Connor said it made less sense for companies like Newcrest and Goldcorp which already have five or six assets, and for whom further diversification could deliver “di-worse-ification”.

“Having a large number of mines can be a pain, look at BHP who have just gone through a simplification process,” he said.

Mr Morgan said the lure of accessing a lower cost of capital was motivating many mid-tier gold miners to pursue global diversification, and he said the same thing could work for bigger miners.

“A lot of investors and corporates were talking [at the recent Denver Gold Conference] about creating a company of globally-relevant size, reducing the cost of capital, and being able to execute on projects with better finance,” he said.

Then, of course, there is Newcrest’s dream of making it big in North America; Goldcorp shares are listed in New York and Toronto, meaning a merger would deliver Newcrest the sort of standing in the world’s most lucrative markets that it has long craved.

“There is an argument, based on conversations I have had with investors, that there could be more investor following, potentially a lower cost of capital for Newcrest if they successfully crack the North American market,” said Mr Morgan.