Could a mine with a great name turn to gold for Newcrest?


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It isn’t just that Red Chris has large resources of gold (20 million ounces) and copper (13 billion pounds) or that its 23,000 hectares of acreage is lightly drilled but that the resource, which has richer grades at depth, is particularly suited to Newcrest’s expertise in block caving and its experience with porphyry geologies.

As soon as the deal is settled in the third quarter of this year, Newcrest will be drawing up plans to both optimise the existing open-cut operations while accelerating the drilling and evaluation for a future high-margin underground mine using the block caving expertise developed at its Cadia mine in NSW. Cadia is one of the deepest and lowest-cost gold mines in the world.

Red Chris not only offers Newcrest the opportunity to deploy what it regards as its unique capabilities to a resource that fits its preference for low-cost and long-life resources, but it gives it a footprint in British Colombia and, indeed, North America.

Newcrest has long harboured a desire for a North American exposure and has explored both acquisitions and a listing to get access to the premium investors have historically awarded gold miners with North American domiciles or listings.

Under chief executive Sandeep Biswas, Newcrest has articulated a strategy of adding to its core mines in Australia and Papua New Guinea.Credit:Carla Gottgens

Newcrest has stayed clear of the war games being played by Newmont, which bid $US10 billion for Goldcorp earlier this year, and Barrick, which has bid $US17.8 billion for Newmont, an all-scrip deal that would produce a $US40 billion industry giant.

Newmont and Barrick have been conducting an aggressive war of words. Newmont prefers its deal with Goldcorp and has been very critical of Barrick’s management but might be able to buy off Barrick with a proposed joint venture (45 per cent owned by Newmont and 55 per cent by Barrick) of their adjacent core operations in Nevada.

Under Biswas, Newcrest, the world’s fourth-largest gold producer, has articulated a strategy of adding to its core mines in Australia and Papua New Guinea, aspiring to build a global portfolio of high-quality assets with measured expansion that leverages its operational capabilities and diversifies its asset base and geographies.

It has a particular interest in the Americas, where it has an indirect 19.9 per cent interest in the El Cobre gold-copper project in Mexico, a 15.2 per cent interest in SolGold in Ecuador (a company BHP also has designs on) and a 27.1 per cent interest in Lundin Gold, which also has gold interests in Ecuador.

Imperial’s parlous financial position – it has been hovering on the verge of insolvency – meant that, rather than the pure share-swaps generally used in gold deals, Newcrest will pay for its Red Chris interest in cash, drawing on its more than $US3 billion of undrawn facilities and conservative balance sheet settings.

The scale of the copper resource at Red Chris relative to the amount of gold caused analysts to question whether Newcrest was acquiring a gold-copper or copper-gold resource.

It is instructive, and perhaps indicative of Red Chris’ potential upside under Newcrest ownership that, despite its financial plight, Imperial didn’t make 100 per cent of the project available; it wanted to retain a material exposure to a resource that appears to be lightly explored and open-ended, both in terms of potential extensions to the existing orebody and at depth.

The scale of the copper resource at Red Chris relative to the amount of gold caused analysts to question whether Newcrest was acquiring a gold-copper or copper-gold resource. Biswas said the Newcrest view was that Red Chris is a gold-copper mine and cited the increases in gold grades at depth.

With the existing large-scale gold mines seeing depleting reserves and declining grades and few big new gold discoveries, increasingly new gold projects could, in reality, also be described as copper-gold mines.

While copper doesn’t attract the premium over its industrial value that gold does for its role as a financial asset, it is seen as a key 21st century commodity and one where, for similar reasons to gold (declining grades from the existing key mines and insufficient discoveries of new resources), there will be a future shortfall of new supply relative to the growth in demand.

For Newcrest, copper is a valuable by-product of its core interest in gold, as long as it doesn’t dilute the proportion of gold in its revenues too materially and jeopardise its status (and the share price premium it delivers) as a gold-copper producer rather than a copper-gold producer.

Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.

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