NCM 2.57% $33.09 newcrest mining limited

dryblower discussing ncm

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    Newcrest's time is nigh: Dryblower

    Wednesday, December 22, 2004
    IN CASE no-one had noticed, there is about US$10 billion sitting on the global gold takeover table right now, and not a dollar is aimed at an Australian gold company – a condition Dryblower predicts might not last long.

    South Africa's bruised battlers, Gold Fields and Harmony, account for around US$7 billion of the pot. The North American trio, Wheaton River, Glamis and Goldcorp the other US$3 billion.

    The game, which is the same as has been played for the past five years, is one of get big, or get out, because of a belief that gold is uniquely placed as a commodity which benefits from economies of scale. In other words, the bigger you are the cheaper it is to produce gold.

    Dryblower doubts whether this applies in all cases, but once the game starts, business logic tends to fade as everyone scramble for a seat at the table.

    Without attempting to belittle the players, the closest analogy is probably a game of musical chairs where there is always one chair less than players and every time the music stops there is a mad dash for what's available – with one player always losing.

    Before digressing to far into the joys of his childhood and the fun of pushing smaller kids out of the way in the chair stampede, Dryblower reckons it's time to consider the likely consequences of the current bout of merger fever in the gold sector.

    For starters, there is the condition of the mega players, those companies near the top of the tree. Barrick Gold and Placer Dome are the two majors which seem most likely to do something to cement their status – or face the prospect of being acquired themselves either by Newmont or AngloGold as they battle for the title of world's biggest.

    Far fetched as it may sound, Newmont might not be out of the takeover sights after a horrible year of crises at assorted projects such as Yanacocha in Peru and Minihasa in Indonesia. There is also the issue of the falling value of the US dollar which makes it cheaper for foreigners to buy US-based companies.

    The position in which Newmont finds itself is actually a useful allegory for the entire gold industry. On the one hand it is the biggest and ought to be seen as a predator. On the other, the minute management stumbles and speculators see a weakness, it becomes takeover prey.

    It is this condition of constant vigilance, heightened by the Gold Fields vs Harmony, and Glamis vs Goldcorp takeovers, that has breathed fresh interest into the status of Newcrest, Australia's gold sector leader, and a company with a marvellous record for reviving world-class assets in a first-world country with exciting potential – and no dominant shareholder on its register.

    From where Dryblower is sitting, Newcrest is a takeover natural, especially as project-development risk previously represented by work at the Telfer and Cracow projects, has disappeared with construction work completed at both mines last month.

    At a price this morning of $17.41, Newcrest is valued at around $5.7 billion, 40% higher than it was a year ago when the Australian dollar gold price was not much different to what it is today.

    Much of the credit for the share price rise belongs to Newcrest's management for the way it has successfully redeveloped Telfer.

    But, some of the credit also goes to global gold speculators who are placing their bets on Newcrest not surviving far into 2005 as an independent miner.

    Until a few weeks ago a prediction like that would have been based solely on the appeal of Newcrest itself as an excellent business. Today, with gold-sector takeover fever building to a new high there is a greater urgency among the mega-miners to maintain a seat at the table.

    For Newcrest management it is fast becoming a case of waiting for the 'phone call from Newmont, Barrick, Placer or AngloGold – or to launch a pre-emptive strike itself in an attempt to remain independent".

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