Newcrest Going For Gold With Acquisition

This story features NEWCREST MINING LIMITED. For more info SHARE ANALYSIS: NCM

The acquisition of Pretium Resources by Newcrest Mining provides a more than twelve-year production boost for the company, but beyond that offers geographic and synergistic opportunity in a deposit rich region.

-Newcrest Mining is set to acquire Canada’s Pretium Resources
-Core resource Brucejack mine offers a foot hold in a gold-copper deposit rich region

Newcrest Mining ((NCM)) will commit US$2.8bn to the acquisition of Pretium Resources, the owners of Canadian underground gold mine Brucejack. Funding for the acquisition will be a combination of existing debt reserves and new scrip.  

The transaction, which has been unanimously recommended by the Pretium Resources board, is expected to complete in the third quarter of FY22

Difficult geography but further discovery potential.

Newcrest has held an approximate 5% stake in Pretium Resources since 2019, which Shaw and Partners points out gives the company an understanding of its new acquisition and the region.

The Brucejack mine, located in Canada’s British Colombia Golden Triangle, is Pretium’s core asset. The mine produced 348,000 ounces of gold at an all-in sustaining cost of US$981 per ounce in 2020.

Macquarie forecasts the acquisition to increase Newcrest’s annual production by more than 350,000 ounces over the next twelve years, sustaining an annual production of comfortably over 2m ounces per annum for Newcrest.

Technical challenges in Brucejack’s resource model has driven reserve downgrades in recent years, and Credit Suisse notes the project is likely to present geological challenges for the company.

Morgan Stanley further noted Brucejack’s costs increased to US$1,060-1,190/oz in 2021, from US$981/oz in 2020, compared to Newcrest’s current group cost base of US$885/oz, but allows for potential for the company to implement change to improve these metrics.

Despite this, Credit Suisse notes Newcrest appears confident that it can execute and deliver value to justify the premium paid. The broker highlighted the company has demonstrated experience in rebuilding and back testing its resource model and mine plan, and has mined similar deposit types in the past, while Shaw correlated production issues with mine, rather than mill, constraints the broker looks to strategy from the company as to how it plans to unlock further production potential.

The analysts do like that the transaction offers Newcrest a foothold in the region, with Brucejack located within 15km of large, undeveloped gold-copper porphyry deposits. The broker notes the location offers potential for Newcrest to make a large discovery or to form partnerships to re-scope existing discoveries.

In particular Ord Minnett pointed to the Golden Marmot prospect, only 3.5km from Brucejack, where recent intercepts have confirmed potential for high-grade mineralisation in the region. Shaw echoed similar sentiments, highlighting the location of the Brucejack mine offered synergies and geographical benefits.

The company also pointed to potential mine and mill expansions, as well as mine life extension, as creating additional value. Given a large resource base Ord Minnett expects mine life can extend beyond the guided end-of-mine-life in 2032, and models an additional five years of production for the site noting this still equates to only 56% of resources.

Outlook for Newcrest Mining

Credit Suisse retains its Outperform rating and target price of $31.00. The broker expects the transaction benefit to be flat year-on-year in FY22 but deliver a 20% increase to production in FY23

Ord Minnett retains its Buy rating and target price of $30.00. The broker values the transaction below the purchase price at US$2.4bn despite potential upside risk but noted Newcrest has confirmed its position as the ASX’s largest gold producer.

Shaw and Partners is Buy rated with a target price of $32.00. Shaw analysts described the purchase as logical and fairly priced.

Macquarie maintains its Outperform rating and target price of $30.00. Incorporating Brucejack metrics and acquisition purchase price into its outlook, the broker updates earnings per share forecasts by 1% in FY22, -1% in FY24 and 5% in FY27 and FY28 and allows for smaller gains following that.

Morgan Stanley retains its Overweight rating and target price of $30.00. Morgan Stanley analysts also noted the premium paid for the acquisition was higher than Newcrest’s trailing average.

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