Newcrest Mining: Takeover Talk to Push Stock Price Higher

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 |  About: Newcrest Mining Ltd. ADR (NCMGY)
by: Jason Hamlin

We wrote about Newcrest Mining (OTCPK:NCMGY) a few months ago, highlighting the company as a prime takeover target.

Newcrest is Australia’s leading gold mining company, boasting a relatively low trading price and a politically stable home. Newcrest, which has a market value of more than $A7.2 billion, has long been viewed as an attractive takeover target for top international gold miners. Newcrest currently mines about 1.5 million ounces of gold a year and is expanding output. Newcrest was upgraded to a “Buy” by UBS, with a $25 share target. UBS is expecting:

improving production from Telfer, strong exploration results from Kencana, and a higher gold price in CY07 to drive Newcrest to our price target of $25. Despite a slow start to the year from Telfer, the drivers that should see production improve over the year remain on track; the underground is developing as planned and recoveries are improving.

Newcrest logo
Reuters recently published an an article supporting our view that Newcrest is a likely takeover candidate. The article focuses on BHP Billiton, quoting Chief Executive Chip Goodyear who said the company was underexposed to bullion and would look at buying a gold mine if the right one came along. The first company mentioned was Newcrest Mining, along with Lihir Gold:

In Australia, the world’s third-largest producer of gold and where BHP is headquartered, shares in top gold miner Newcrest Mining Ltd., have increased 5.5 percent this week, with close rival Lihir Gold Ltd. up almost 6 percent. Both companies have long been tipped by analysts as takeover targets.

BHP Billiton Chairman Don Argus echoed the sentiment of many miners by stating that delivering growth, possibly via acquisitions, was a much higher priority than returning cash to shareholders.

Newcrest’s stated strategy of developing large, long life mines or smaller high margin mines, which are low on the cost curve, has shaped their operating mine portfolio.

Newcrest currently has five operating mines — four located in Australia and one in Indonesia. All mines are based on the conversion of exploration successes into efficient and cost effective mines. The company has a demonstrated track record of developing and commissioning high quality large scale mines (Cadia Hill, Ridgeway & Telfer) and small scale gold mines to capitalize on high grade deposits (Gosowong, Toguraci & Cracow). The Telfer mine, a large open cut and underground mine in Western Australia, has the potential to become the largest gold mine in Australia with production expected to average 800,000 ounces (25,000 kg) of gold per annum.

The stock price of Newcrest is up nearly 20% since we highlighted it as a buy and takeover target on September 6th. Not a bad 3-month return. Still, we believe Newcrest has much further to run and any takeover bid should send this stock up another 20-40%. Even without a takeover, we expect Newcrest to outperform its peers as the gold bull starts kicking again. Newcrest Mining Limited is listed on the Australian Stock Exchange [ASX] under stock code NCM. The stock can also be purchased as a Pink Sheet in the U.S. under the symbol NCMGY. As always, you should perform your own due diligence and exercise additional caution when purchasing thinly-traded pink sheet securities.

Disclosure: The author owns shares of Newcrest Mining.

NCM 1-yr chart:

Newcrest mining chart