Newcrest Mining Limited (NEM) Earnings Call Transcript & Summary

Good morning, and welcome to Newmont's analyst and investor webcast and conference call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Tom Palmer, President and Chief Executive Officer. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today for this exciting announcement. After an intense period of exclusive due diligence, along with the incredibly hard work from the dedicated teams at both Newcrest and Newmont, we have announced the signing of a definitive agreement to acquire Newcrest. This is a transformational transaction, one that is underpinned by a clear strategy that will combine two of the industry's senior gold producers and set the standard for safe, profitable and responsible gold and copper mining. With industry-leading talent and decades of collective experience, the combined company will create significant value for both sets of shareholders, our combined workforce and the communities in which we operate and strengthen our position as the world's leading gold company. Today, I'm joined by our executive leadership team, and we will all be available to answer questions at the end of the call. As a reminder, please note our cautionary statements and refer to our SEC filings, which can be found on our website. The acquisition we announced yesterday is underpinned by a very clear and focused strategy, designed to ensure that the Newmont of today not only retained its leadership position in the gold industry, but also strengthen its underlying foundations to deliver decades long shareholder value. To give you an insight into the corporate strategy process, we have fine-tuned over the last several years, let me walk you through the key inputs and outputs that together define our strategic vision, our key strategic drivers and the potential execution pathways. We start by analyzing and understanding the key global megatrends that impact on the world, our industry and Newmont specifically. These cover society, technology and geopolitics. These megatrends represent both individually and collectively, a very dynamic, complex and unpredictable environment, one in which we currently operate and will be expected to succeed in over the long term. We then combine our view of these megatrends with a comprehensive understanding of our core strengths, our unique capabilities and also the potential gaps that we need to close in order to differentiate Newmont today and in the future. Our strategic drivers focus on three fundamental elements. First and foremost, building, maintaining and strengthening our responsible gold leadership position through our culture, our performance and our relationships. Second, identifying industry consolidation opportunities that play to our strength and competitive advantages and are also executable and value accretive to our shareholders. Lastly, finding opportunities to diversify our commodity mix so that we continue to deliver to our shareholders the benefits of responsibly produced gold today, together with an increasing future exposure to the world's key energy transition metal, copper. Our decision to approach Newcrest earlier this year with the idea of a potential combination was grounded in these three key elements of our strategy. First, it presented an opportunity to achieve the best possible collection of Tier 1 gold, copper assets in the industry, under one umbrella and benefiting from Newmont's operating model, sustainability practices and disciplined capital allocation process. Second, the addition of the Newcrest assets to the Newmont portfolio allows us to consolidate two world-class gold and copper mining districts in Australia and in Canada, unlocking compelling strategic, operational and sustainability-driven synergies that are unique to this transaction. Lastly, the combination complements Newmont's existing copper production and project pipeline with world-class growth optionality. Connecting the external environment with internal capability is key to being able to devise and execute a successful strategy in general. The acquisition of Newcrest by Newmont announced yesterday executes on a clear strategy with robust planning and preparation. I'll now take you through the powerful value proposition of this transaction. Today, Newmont leads the gold industry in safety, sustainability, profitable production and shareholder returns, differentiating ourselves in four key areas. First and foremost, our values-driven commitment to leading sustainability practices. Second, Newmont has created a global portfolio of world-class operations and projects. Third, these assets are managed through our integrated operating model with a proven track record of delivering value. And finally, we consistently apply a disciplined approach to capital allocation. Our acquisition of Newcrest represents a powerful value proposition that will build upon these four key differentiators, strengthening our robust global platform to generate strong and resilient returns. Upon completion of the transaction, the combined business is expected to set the new sustainability standard, strengthening Newmont's position as the gold sector's industry leader to create the industry's strongest portfolio of world-class gold and copper assets with 10 Tier 1 operations and a Tier 1 district in the highly prospective golden triangle of British Columbia, to deliver $500 million of annual synergies from G&A, supply chain and full potential through our proven operating model; and to target over $2 billion in cash from portfolio optimization. We will continue to drive a disciplined, balanced approach to capital allocation, maintaining financial flexibility whilst balancing steady reinvestment into our business and robust returns to shareholders through our industry-leading dividend framework. Today, I'll talk through each of these differentiators, how they deliver value and how Newcrest fits into our long-term strategy. At Newmont, we take pride in our heritage as a values-driven organization with a clear purpose. Our core values are safety, sustainability, integrity, inclusion and responsibility. They have been developed over a long period and through multiple generations of leaders. Together, they are fundamental to how we run our business, where we choose to operate and how we conduct ourselves on a daily basis. And we have learned that achieving our purpose requires a strong governance structure and a commitment to accountability and transparency. Building on Newcrest's well-established sustainability credentials, Newmont will apply its proven sustainability leadership and practices to Newcrest's operations by bringing a clear focus on mitigating safety risks along with visible leadership in the field to drive a fatality-free business; by building on Newmont's sustainability leadership and commitment to meaningful social engagement based on inclusion, transparency and integrity in order to be the partner of choice for governments, host communities, suppliers and our workforce; by remaining committed to Newmont's leading environmental stewardship practices and climate goals; and by creating a diverse, inclusive and equitable workplace where everyone is welcome, attracting and retaining the breadth of skills and talent needed to continuously improve performance. By aligning our purpose and values across the combined organization, we will be very well positioned to safely and sustainably deliver on our commitments through the industry's best portfolio top-tier operations in low-risk mining jurisdictions, a portfolio that produced approximately 8 million ounces of annual gold production with 80% of this production coming from assets based in Australia and the Americas. And notably, more than 5 million ounces or 2/3 of this gold production coming from 10 large, long-life, low-cost Tier 1 assets. Underpinning this portfolio is the world's largest gold reserve and resource base of 96 million ounces of gold reserves declared by Newmont and 52 million ounces declared by Newcrest which, when combined with a robust organic project pipeline provides the pathway to steady gold production and cash flow for many decades to come. In addition to gold, the acquisition of Newcrest more than doubles Newmont's exposure to copper. The combined annual copper production will be approximately 350 million pounds, all coming from Australia and Canada and 50 billion pounds of copper reserves and resources from Newcrest will be added to Newmont's existing 42 billion pounds, providing very significant exposure to this metal of critical importance to our work. As we demonstrated following the acquisition of Goldcorp 4 years ago, we will focus on value over volume and look to optimize the new portfolio, targeting approximately $2 billion in cash over the next 24 months. As an important part of our due diligence process over the last 4 weeks, we had key members of our executive team lead site visits. Dean Gehring led the visit to Brucejack and Red Chris in Canada; Aaron Puna to Lihir in Papua New Guinea; Rob Atkinson to Cadia in Australia. Their insights were key inputs to developing our synergies and how we plan to integrate the Newcrest operations into our portfolio and operating model. Now let me briefly take you through how we plan to integrate these operations, starting with Australia. Newmont has a long history in Australia and a shared heritage with Newcrest, establishing our Australian subsidiary way back in 1966 that would become Newcrest some 25 years later. Today, Newmont and Newcrest are two of the top gold producers in Australia with four operating mines, of which three are Tier 1 assets. The combination of these four operations will leverage Newmont's existing scalable operating model in Australia to combine both companies' leaders, subject matter experts, supply chains and regional infrastructure to drive best-in-class performance. By bringing these four operations together into our consolidated Australian portfolio, we will create unprecedented economies of scale in one of the world's most favorable mining jurisdictions creating efficiencies and value with a shared workforce, technical expertise and large-scale supply chain optimization. Moving up to Papua New Guinea. Lihir is one of the world's great gold mines, a Tier 1 operation by any measure. And in addition to Lihir, there is significant gold and copper growth in PNG to the world-class Wafi-Golpu project. We are committed to building and maintaining strong, proactive, mutually beneficial and long-lasting relationships with the PNG government and local communities while supporting safe and profitable operations. As part of this commitment, Newmont plans to establish PNG as a stand-alone fifth region in our portfolio with an in-country senior leadership presence. Moving across to Canada. This transaction will also significantly strengthen Newmont's position in both. By combining the two existing Newcrest operations, Brucejack and Red Chris with Newmont's Saddle North and Galore Creek projects, a Tier 1 district in the highly prospective Golden Triangle region of British Columbia will be created, a district in which Newmont will be operating for decades to come. Similar to Australia, this combination in Canada will also leave Newmont's existing regional operating model in North America to combine and optimize both companies' leaders, subject matter experts, supply chains and regional infrastructure to drive best-in-class performance. Turning now to the synergies that we have identified from our due diligence efforts. Over the last 4 weeks, in addition to the site visits that I mentioned previously, we have had over 120 subject matter experts working through a robust due diligence exercise. As part of this work and leaning into our proven track record of synergy delivery, our teams have identified $500 million in annual synergies that we will deliver from this acquisition. On top of the $100 million we expect to realize from the G&A synergies of this combination, we estimate approximately $200 million in value from supply chain optimization. This will come from applying best-in-class pricing and our existing strong partnerships with key suppliers, smelters and equipment manufacturers to deliver -- to realize benefits from our increased economies of scale. We also expect to realize at least $200 million through the disciplined application of our proven full potential program, which leveraged Newmont's operating model and team of experienced leaders and subject matter experts to improve both productivity and costs. And similar to what we experienced from the Goldcorp acquisition 4 years ago, the biggest value drivers are expected to come from the two Tier 1 operations in Cadia and Lihir. For example, at Cadia, we see the potential to increase average mill throughput from 33 million tons per year to 35 million tons by optimizing maintenance schedules and working to debottleneck the processing circuit. And similar to the improvements that we've made to the Mill of Boddington over the last 10 years, Cadia has the potential to enhance the performance of the current equipment in the mill to push two and possibly beyond its nameplate capacity. At Lihir, we see the opportunity to take what is currently a short-term -- design and bring forward a more comprehensive and long-term mine plan to improve productivity. Through this approach, Lihir would be able to improve mining rates and reduce the amount of time spent rehandling material, ultimately leading to higher production and lower costs. Adding all of this up, we expect to realize estimated annual pretax synergies of $500 million within the first 24 months of closing this transaction, and we have had this estimate independently validated by a third party. Turning now to our capital allocation strategy. Our capital allocation priorities remain unchanged and will continue to be executed according to our clear and balanced strategy. First and foremost, to maintain the industry's strongest balance sheet. Second, reinvest in our business through exploration and organic growth, staying disciplined as we focus on sustainably improving margins and advancing the combined portfolios' most profitable projects. And third, to return excess cash to shareholders through dividends. Newmont understands the importance of shareholder returns having returned over $4.5 billion to shareholders since the announcement of our dividend framework in October 2020 and having maintained a dividend yield above 3% for 10 consecutive quarters. I can confirm that following this acquisition, we remain firmly committed to our industry-leading dividend framework. And finally, I'll take a moment to cover some of the key aspects of this transaction. Our Board of Directors have approved a binding offer to acquire all outstanding Newcrest equity at an exchange ratio of 0.4 Newmont shares for each Newcrest share. Newcrest will fund and pay to its shareholders a special dividend of up to USD 1.10 per share. And the agreement is subject to shareholder and relevant regulatory approvals with the transaction expected to close in the fourth quarter of this year. So in closing, we are very excited about this strategic transaction and the long-term value and optionality it will bring to both sets of shareholders and stakeholders. Through this powerful combination of high-quality gold and copper assets and projects concentrated in low-risk jurisdictions, Newmont will be well positioned to set the new standard for gold mining across the industry. We look forward to continuing our work with a talented and experienced team at Newcrest as we work together to begin this next chapter of our journey to create value and improve lives through responsible sustainable mining. Thank you for your time. And with that, I'll turn it over to the operator to open the line for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Anita Soni from CIBC World Markets.

So my first question, I was intrigued by your comments about Lihir. So I think you qualified it as a Tier 1 asset. And from my analysis, the cost push it into the Tier 2 category. But your comments about material movements are something that I've noted. Can you just clarify what you're looking at? I'm assuming it's not moving the waste back in front of the face after they push it out of the way to mine it. Is that what you're referring to?

Yes. Thanks, Anita, I'll start and then pass to Aaron Puna if we can get Aaron on the line as well. Aaron was on the ground there, and I think he'd been to Lihir and probably he can paint that picture for you. But it was certainly about looking at how materials moved around that operation, how you think about the mine plan and what's happening with rehandle. And thinking about a longer term your mine plan and what you might be able to do to more efficiently move that dirt around. I think there was also just been really fundamental basics around how you think about drill and blast and [indiscernible] productivities that we're pretty confident with some of our full potential techniques focusing on the mine being the bottleneck that we can deliver some value and certainly have Lihir firmly in the Tier 1 definition by anyone's measure. Aaron, if you're connecting in, he's in Ghana at the moment. Hopefully, the phone lines work, he can give you a bit of color from on the ground.

Yes. Thanks, Tom, and thanks, Anita, for the question. I think to add some further detail. As mentioned, our focus will center around the already proven full potential process, where we maximize the capability and capacity of the mine value chain. The initial priority will be deconstraining the mine, focusing on short and medium-term planning and planning for productivity. We think that by doing this, we can make a significant shift in terms of the current load and hold fleet and move it more towards the industry benchmark which ultimately will lead to a significant reduction in the mining costs.

Okay. So -- because you mentioned about material rehandle, can you clarify that?

Aaron, do you want to pick that up in terms of what you saw on the ground, the double-handing of material?

Yes. Thanks, Anita. So in terms of rehandle, what we see Anita is inefficiencies in the short, medium-term planning processes that require material to be touched once, twice or even 3x before it reaches its final destination. We believe that -- and we can see an obvious pathway to better planning and making sure those medium-term placement horizons are clear that we can remove a lot of that rehandle.

Okay. And then just I'll move to the second question, which is in terms of the $2 billion of portfolio optimization, I'm assuming that means asset sales? Or is there something else in there within that portfolio optimization that you should be thinking about? And could you provide some color on what you would -- what parameters you would put around assets that you might looks to optimize? I understand you probably don't want to name things. But if you could just give us an idea of some of the criteria what you would rationalize?

Yes. Thanks, Anita. So when we think about portfolio optimization, it's certainly looking to rationalize the portfolio through divestments like we did 4 years ago with Goldcorp and Red Lake, KCGM and our share in Continental Gold. But it's also about how we look at our project pipeline of the two companies coming together and thinking about the sequence of projects and the order in which they take place. So we'll go through a considered process, both in terms of the portfolio and the asset base, but also the sequence of projects. Consistent with our capital allocation strategy, we certainly will first and foremost maintain the strength and flexibility of our balance sheet, but also have the appropriate amount of cash going towards reinvestment in the business. That's in terms of the cash draw towards that reinvestment but also managing project execution risk. And then ensuring that we're generating appropriate quantities of free cash flow to be able to support industry-leading returns. So portfolio optimization has got project resequencing that's work in front of us. And there's an embarrassment of riches in terms of that project pipeline and the sorts of opportunities we have to work our way through that. Then when I come back to the portfolio, thinking about it at this way, our value over volume is our approach. And the starting point for us is the 10 Tier 1 assets that make up the very core of this business. And as I said in my remarks, that makes up about 2/3 of the production of the two companies, around about 5 -- a bit over 5 million ounces. I would add on to that the Tier 1 district of British Columbia, Golden Triangle. So really a pseudo 11th Tier 1 district. For us, that's the starting point. We may go through portfolio optimization, and that is our business going forward, those 11 Tier 1 operations. But then we've built out from here. Where do we have operations that don't fit the Tier 1 definition that we use, but we can see a pathway to getting there, given the exploration potential of some of the ore bodies that we sit on. We will then consider those coming into the portfolio and staying with us in the long term. We'd also look at assets that might never be a Tier 1 asset, but they're in great mining jurisdictions, they're very long life, and they're a great training ground for future lease on Newmont, and there could be a real logic for them being in our business. And then there'll be assets that might not fit any of those definitions and we will then go through a disciplined rigorous process to then look at how we might rationalize our portfolio and realize full value for those assets. We're under no pressure to do it. We can easily accommodate Newcrest's five operations into our existing operating model. But we will go through a disciplined and rigorous process to review our portfolio, to optimize it and realize that at least $2 billion of cash over the next couple of years.

The next question comes from Josh Wolfson from RBC Capital Markets.

Tom, you mentioned pro forma production of roughly 8 million ounces. Are there any goalposts that we should be thinking about in terms of costs and capital spending, steady state, maybe after the synergies are factored in there?

Yes. Still early days for us to work our way through that process. And a bit as I was explaining to Anita, our exercise will start with the core of the portfolio essentially that you should follow in that answer, the 11 Tier 1 operations, we'd understand what the capital requirements are to sustain that portfolio, what the cost profile looks from that and then build out the decisions we make around other assets that we would have in our portfolio over the long term. And then looking at the sequence that we have for our organic projects and what -- at what pace at which we bring those through, and then what does that mean in terms of both gold production and copper production. And that will be an important part of the work that we will now start having reached a definitive agreement to now start working on as we move towards close. So both the operating portfolio and the project pipeline are going to be very important part of our analysis.

Got it. And then the presentation, the press release, it doesn't really mention the Lundin Gold equity stake or Ecuador. Is it safe to assume this as a noncore position pro forma?

No, Josh, I wouldn't read into that. It's -- Fruta del Norte is a fantastic asset, and Lundin are an excellent bunch of operators. And so we would certainly see that being an important part of the wider portfolio, and we'd certainly want to be working with the Lundin team to understand how we can continue to extract value from that. But it's a wonderful operation and it's very well.

Great. And if I can tuck in sort of one maybe higher-level question, the theme here certainly seems to be focusing on Tier 1 assets and certainly scale being a big function of that. This is something probably longer term. But when you look at consolidation in the sector, which has been a big focus for Newmont and its peers, do you see there being other opportunities beyond Newcrest, longer term?

Yes. Thanks, Josh. I think when we did the -- I'll try to explain in my remarks, it's having clarity on your corporate strategy, company strategy, allows you to very clearly drop out of that -- an M&A strategy in a consolidating market. And when we did our rate and rank, we used two -- three filters. One is Tier 1 operations, open pit underground anywhere in the world, we believe that we can run them as well as anybody, if not better. Second one for us was consolidating in top 2 jurisdictions. U.S.A., Canada, Australia are top of our list in terms of those low-risk jurisdictions. And the third one is the ability to get further exposure to copper, and it comes with the long-life gold mines. So we know you get the copper with the gold metal in those ore bodies. When we then do the rate and rank in a consolidating industry, Newcrest was top of our list with Daylight to the next. And so then we start the process of relationship building to see what we might be able to do, so strategy, relationships and an opportunity presents. So we've very fortunate to be able to navigate our way through that over the last few months. And now we have a significant amount of work in front of us to close out this transaction, to do the appropriate integration, to do the portfolio optimization and to deliver on the synergy commitments, and that will be our focus over the next period of time.

[Operator Instructions] Our next question comes from Tanya Jakusconek from Scotia Bank.

Just wanted to come to the operating synergies. But before that, can I just confirm, Tom, with you that there are no financial tax synergies that I should think about?

No, we're very much focused on G&A to the standard overheads, supply chain and then what we'll deliver for cost and productivity improvements through full potential.

Okay. So I'll take that as a no. So if I can then focus on the operating synergies and I just want to come back to Lihir, and I need to ask about the mining side of it. So I do want to ask on two other aspects at that operation that when I was there, I thought could need some help. How do you feel about -- or do you see any synergies in the maintenance at that operation? And anything in the processing facility? That's my first question on Lihir.

Thanks, Tanya. And Aaron, I'll get you, again, having been on the ground and walk through those facilities. So we'll get you to give the firsthand views of the opportunities we see in the maintenance and the processing side and maybe pick up maintenance, Aaron, on both mobile equipment and fixed plant.