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Morningstar | Newmont's Announced Acquisition of Goldcorp Comes at a Cheap Price

A pipeline of development projects should partially offset the decline at some older mines while improving Newmont's cost profile.Nevada is an important piece of Newmont's portfolio, with nearly 20 mines operating in close proximity. This allows the mines to share facilities that employ a variety of processing methods to maximize recovery. In addition, brownfield investments can leverage nearby operations, lowering potential capital costs. Newmont's other mines are in Mexico, Ghana, Australia, and Suriname.Newmont faces declining production and rising costs at Yanacocha (Peru) and Ahafo (Ghana). However, new mines Merian and Long Canyon, development projects at Ahafo, and the acquisition of Cripple Creek & Victor should help offset the decline.In early 2019, Newmont announced the acquisition of fellow senior gold producer Goldcorp for a relatively mild premium. The cheap price gives Newmont signficant leeway to create value out of the deal, as Goldcorp has struggled with the operations at its mines. The deal stands in stark contrast to the merger history of the sector, in which large premiums consistently destroyed shareholder value.Our long-term nominal gold price forecast is $1,300 per ounce in 2020. Investment demand will weaken further as the Federal Reserve raises interest rates, weighing on near-term gold prices. However, Chinese and Indian jewelry demand should eventually fill the gap left by investment demand. Strong preferences for gold in these countries drive high income elasticity, and rising incomes should result in robust jewelry demand growth over the next few years. Strong demand will lead to a production shortfall, requiring a higher incentive price to encourage additional mine production. However, cost deflation caps the potential upside from an otherwise strong demand story. Depreciation in producer currencies, lower oil prices, and general mine cost deflation stemming from the end of the Chinese-driven commodity boom have helped drive cost reductions, lowering the marginal cost of production.