Has Saudi Arabia’s Relationship With Russia Reached Its Limits?

By Simon Watkins - Feb 06, 2023

• The current Brent oil price is just about the level at which Saudi Arabia breaks even from a fiscal perspective and it is way lower than Russia’s fiscal breakeven oil price.
• 
  
• It is certain that Russia would have been pressing for a bigger OPEC+ production cut behind the scenes.
• 
  
• Russia’s omni-shambolic invasion of Ukraine has significantly damaged the credibility of President Vladimir Putin as a shrewd geopolitical operator.

To many dedicated oil market watchers, last week’s decision by ‘OPEC+’ (the Saudi Arabia-led OPEC group of countries ‘plus’ Russia) to stick to its previously agreed oil production cuts quota of 2 million barrels per day (bpd) was made regardless of ongoing concerns in the West that energy prices remain at levels that keep fuelling inflation, pushing interest rates higher and catalysing economic slowdowns. It is true that in recent months, these cuts have allowed the Brent oil benchmark to consistently trade around or well above the US$80 pb level that the U.S. and its allies have long seen as the topside of a targeted oil price range of US$40/45-75/80 per barrel of Brent for reasons analysed in full in my last book on the global oil markets. However, these cuts, that are due to run until the end of this year, represent only around 2 percent of the recent historical mean average of supply in the global oil market. Additionally, current oil prices are at levels that barely help Saudi Arabia in budgetary terms at all, with a fiscal breakeven oil price forecast of US$78 pb of Brent in 2023, compared to over US$80 pb of Brent in the previous year. Significantly as well, prices are way below the level that Russia wants, and would have been strongly lobbying for, with a fiscal breakeven oil price of US$114 pb of Brent this year, up from around US$64 pb before its invasion of Ukraine. So, to invert the recent Chinese comment on Russia: has Saudi Arabia’s relationship with Russia reached its limits?

Saudi Arabia had a fiscal breakeven Brent oil price of around US$80 pb for some time before it and its fellow OPEC members launched the Second Oil Price War in 2014 (the First Oil Price War being the 1973 Oil Crisis, which Saudi and OPEC won). After the War had ended in 2016, the Kingdom’s fiscal breakeven Brent oil price was expected to remain above US$80 pb for several years. Saudi Arabia thought before it had launched the Second Oil Price War that the fiscal breakeven price of U.S. shale oil producers was also around US$80 pb of Brent, as did many oil market observers at that time. Therefore, Riyadh wanted to use this perceived breakeven point to destroy or at least disable the increasing threat from these U.S. shale oil producers to protect its own oil market share and, therefore, the power of Saudi Arabia in the world. However, as also analysed in depth in my last book on the global oil markets, the U.S. shale oil sector performed an astonishing turnaround in its operational efficiencies by turning itself during the course of the Second Oil Price War into a leaner, meaner version of itself with a breakeven point as low as US$35-40 pb of Brent. Since then, Saudi Arabia has been fighting a rearguard action – including the 2020 Oil Price War - against the continuing success of the U.S. shale oil sector, which has meant the supplanting of its own oil in certain segments of the market and the gradual erosion of its own power in the world. This is why, at the end of 2016, the only way OPEC could effectively bring oil prices back up to repair their devastated government finances was to enlist the help of Russia in the new ‘OPEC+’ grouping.

Related: U.S. Drilling Activity Continues To Slow

For the U.S.’s part, it is equally understandable that these moves by Saudi Arabia were seen as a profound betrayal of trust. Back in 1973 when the U.S. economy, and those of its key allies, was under material threaten from the Saudi Arabia-instigated Oil Crisis, Washington believed that the foundation stone of understanding between the two countries - as laid out in the 1945 Agreement between them - had been shattered. This Agreement had been struck at a meeting on 14 February 1945 between the then-U.S. President, Franklin D. Roosevelt, and the then-Saudi King, Abdulaziz bin Abdul Rahman Al Saud. The deal, which ran smoothly until the 1973 Oil Crisis, was this: that the U.S. would receive all the oil supplies it needed for as long as Saudi Arabia had oil in place and, in return for this, the U.S. would guarantee the security both of the ruling House of Saud and, by extension, of Saudi Arabia. From when the Oil Crisis ended in 1974, the U.S. was determined to minimise the degree to which it was subject to the whims of Middle Eastern oil producers – especially Saudi Arabia – and to this end it pursued the ‘Kissinger Doctrine’ in its Middle East strategy, defined by its energy needs. 

This Doctrine, originated by Henry Kissinger, the highly influential U.S. geopolitical strategist who served as National Security Advisor from January 1969 to November 1975 and as Secretary of State from September 1973 to January 1977, was a variant of the ‘triangular diplomacy’ that he advocated in formulating the dealings of the U.S. with the two other major powers of the time, Russia and China. In essence, it was a ‘divide and rule’ idea, in which one side was played off against the other, leveraging whatever fault-lines ran through target areas at either a community, national or international level. These fault-lines could be economic, political, or religious, or any combination thereof. In the case of the 1974+ strategy, the fault-line used was differing attitudes to the concept and practical interpretation of ‘Palestine’ and in more recent years it is been the Sunni-Shia divide running across Islam, as exemplified in Saudi Arabia and Iran, respectively.

This said, it might be that Saudi Arabia has not been lost completely to the U.S. in meaningful terms, despite the drift of Riyadh – and of Crown Prince Mohammed bin Salman (MbS) in particular – towards Russia and China, in order of timing, since 2016. In precisely this context it is interesting to note that Saudi Arabia did not pressure its fellow OPEC members to increase the size of the production cut that was agreed at the end of October last year, in an attempt to raise oil prices further. Right now, as mentioned, the Brent oil price is just about the level at which Saudi Arabia breaks even from a fiscal perspective and it is way lower than Russia’s fiscal breakeven oil price. It is certain that Russia would have been pressing for a bigger production cut behind the scenes, and yet the level of production cut across OPEC remained the same. It can reasonably be posited, therefore, that at least some doubt has surfaced somewhere at the top of the Saudi power structure that currently alienating the U.S. and its allies – and decisively reaffirming its commitment to Russia, and to China – is an unwise course of action. 

Part of this maybe a consequence of the view - privately held by China as well, according to sources in the European Union’s energy security apparatus spoken to exclusively by OilPrice.com recently – that Russia’s omni-shambolic invasion of Ukraine has significantly damaged the credibility of President Vladimir Putin as a shrewd geopolitical operator and of his country as a major military force. By extension, it has done the same for China’s President Xi Jinping and his country too. Xi knows this, as reflected in the quick 180-degree turn that China performed after Russia’s invasion, from the two countries enjoying a ‘no limits’ relationship to one that suddenly had a lot of limits indeed. Consequently, Saudi Arabia may be hedging its Russian bets with the U.S. Part of this also could be that after the entirely justified furore that followed MbS’s refusal to take a telephone call from U.S. President Joe Biden, several senior officials from the West Wing laid out in detail to King Salman what a world Saudi Arabia would be facing if the U.S. withdrew all support from it, including its military, and then finally enacted the ‘No Oil Producing or Exporting Cartels’ (NOPEC) bill. 

There are those who might say that Saudi Arabia and OPEC+ have kept the oil production cuts as they were have done so because they know that China’s demand for oil will ramp up yet again once the current wave in COVID-19 infections have run their course. Certainly, it is likely that China’s economic growth will pick up again but whether this will directly correlate to a significant rise in oil prices is less certain. As highlighted by OilPrice.com recently, a cyclical recovery in China this time around is likely to be led by household consumption, mainly services. Demand drivers are likely to switch this year, with travel rising and property less negative, while infrastructure and manufacturing slow. As Rory Green, chief China economist for TS Lombard, in London, exclusively told OilPrice.com recently: “ The certain outcome is an increase in oil demand - we estimate a 5-8 percent increase in net import volumes – but this is unlikely to cause oil prices to surge, especially as China is buying at a discount from Russia.” 

By Simon Watkins for Oilprice.com

North Korea Is Becoming A Big Problem For China’s Geopolitical Ambitions

By The Jamestown Foundation - Feb 04, 2023, 2:00 PM CST

• Recent developments concerning North Korea pose both traditional and non-traditional security challenges to China.
• 
  
• Beijing has both the motivation and the ability to take a leading role in inspiring a change of course by North Korea. 
• 
  
• China should play a more positive role in the North Korean denuclearization process by acting as a mediator

The existential North Korean nuclear and missile threats negatively impact the Asia-Pacific security environment for the United States, South Korea, Japan and Australia. In response, these countries have taken countermeasures to defend themselves against the growing danger from North Korea. As a result, North Korea’s nuclear and missile capabilities indirectly worsen China’s “security dilemma” by spurring the U.S. and its allies to devote greater resources to maintaining a strong security presence in Northeast Asia. This situation is illustrated by Beijing’s consistent criticism of Seoul for allowing the deployment of the U.S. Terminal High Altitude Area Defense (THAAD) anti-ballistic missile defense system in South Korea since 2017. Although South Korea has sought to reassure China that the system is aimed at counteracting the threat from North Korea, Beijing has maintained that the presence of the U.S. THAAD in Korea “clearly undermines China’s strategic security interests” (PRC Ministry Foreign Affairs [FMPRC], August 10, 2022).

Although China has been accused of not putting enough effort into the denuclearization process, achieving success in eliminating nuclear weapons from the Korean peninsula would serve China’s security interests in several ways, including by removing a powerful justification for the U.S. and China’s neighbors to devote resources to regional security. In part due to North Korea’s growing missile capabilities, South Korea, Japan and Australia have all recent strengthened their respective missile development programs. In 2021, the United States also lifted the restrictions it had imposed on South Korea limiting the range and payload of its ballistic missiles. According to previous South Korea president Moon Jae, this has removed “security shackles”—allowing South Korea to regain its missile autonomy (Korea Herald, May 22, 2021).

New Approaches in Japan, South Korea

In 2022, with new leadership under President Yoon Suk Yeol, Seoul has supported steps to expand and “normalize” THAAD operations in South Korea, making technical upgrades and allowing an additional eight acres of land to house the system (South China Morning Post, August 12, 2022). The PRC has criticized the move for contravening the “three noes,” which had become an operating principle for China-South Korea relations advanced by previous President Moon Jae-in: no further THAAD deployments; no joining U.S.-led missile defense networks; and no participation in a trilateral military alliance with the U.S. and Japan (Korea Herald, July 28, 2022). The Moon administration had previously used the Three Noes to reassure China, which helped stabilize relations in late 2017, following a diplomatic fracas triggered by China’s economic retaliation against South Korea following the initial deployment of the U.S. THAAD earlier that year to counter the threat from North Korea (China Brief, March 31, 2017).

Not only has South Korea changed its approach to security of late, but Japan has also moved to augment its military might. In November 2022, the ruling Liberal Democratic Party, along with its junior coalition partner, Komeito, reached a consensus that Japan should seek to acquire counter-strike capabilities in order to address the rapidly worsening regional security environment (Kyodo News, December 2, 2022). While China’s military modernization has played a key role in this deteriorating regional security environment, so too have North Korea’s nuclear development and activities. In fact, a real possibility exists that Tokyo will even purchase Raytheon-made Tomahawk cruise missiles (The Defense Post, November 30, 2022). Australia, too, has sought to focus on developing its cruise missile capabilities (Australian Defense Magazine, September 29, 2022).

Would China Change Course?

Recent developments concerning North Korea pose both traditional and non-traditional security challenges to China. While North Korea’s recalcitrance leaves China with neighbors strengthening their militaries, the continuing North Korean nuclear crisis presents other challenges as well. The most pressing issue is that as North Korea’s economy struggles under the weight of international sanctions, imposed for its nuclear and ballistic missile development activities, a growing number of people will seek to flee north to China in search of a better life. Again, dealing with a nuclear North Korea that has aggressive and unpredictable tendencies is a concern for China as its largest trading partner and main economic supporter.

Amidst these concerns, China could seek to play a more active and central role in promoting denuclearization of the Korean peninsula (Permanent Mission of the PRC to the UN, June 8, 2022). This is because, at this moment, only China and Russia are close enough to North Korea to have leverage with Pyongyang concerning the nuclear conundrum. The new leadership in South Korea is at loggerheads with Pyongyang, as opposed to the previous Moon government, which had a more cordial relationship with Kim Jong Un.

Hence, China has both the motivation and the ability to take a leading role in inspiring a change of course by North Korea. Also, China has an incentive to ensure that the sanctions on North Korea imposed by the United Nations Security Council (UNSC) are slowly lifted so that the North Korean economy does not implode further, which would have spillover effects on China (Xinhua, May 12, 2022).

China’s role in the North Korean nuclear crisis has become more prominent as Pyongyang has called off the self-imposed moratorium on testing nuclear weapons and long-range missiles it had observed since late 2017 and has resumed intercontinental ballistic missile (ICBM) tests (Yonhap News Agency, November 18, 2022). China’s role in the nuclear issue has also gained more prominence as doubts are cast on Beijing’s intentions to ensure a nuclear weapons-free North Korea that would result in a nuclear weapons-free zone (NWFZ) on the Korean peninsula. Some observers believe that North Korea will conduct a seventh nuclear weapons test this year, which would be its first since 2017 (CTBO, September 3, 2017).

For China, the first North Korean nuclear test in over half a decade could mean efforts by the U.S. to strengthen extended nuclear deterrence to protect its allies, Japan and South Korea (Huanqiu, November 22, 2022). In December 2022, Anthony Carullo, director of plans and policy at the U.S. Strategic Command, reaffirmed the U.S. commitment to South Korea regarding its extended deterrence that comprises both conventional and nuclear capabilities (VOV World, December 6, 2022).

U.S. National Security Adviser Jake Sullivan also reaffirmed this commitment stating that “[w]e are working within our alliances, with both the Republic of Korea and Japan, to develop an effective mix of tangible measures to this end and specific practical steps to take to strengthen the extended deterrence commitment” (The Korea Times, December 1, 2022). This implies a strengthened nuclear environment in China’s immediate neighborhood that Beijing would have to deal with.

These developments are not positive signs for Taiwan’s own security, especially as Taiwan faces territorial disputes both in East China and South China Seas. While Senkaku/Diaoyu Island disputes remains an issue in the East China Sea, Taiwan claims sovereignty over all the islands in the South China Sea. In recent years, Taiwan has strengthened its military capabilities, including cruise missiles as well as holding live artillery drills. Hence, any military developments in the region will have a domino effect on Taiwan (India Today, August 9, 2022).

Conclusion

All these developments add to not just military pressures but also diplomatic pressures on China. Hence, China should play a more positive role in the North Korean denuclearization process by acting as a mediator.

Some of the steps that could be adopted are:

1. Educate North Korean leader Kim Jong Un on the advantages of sanctions being removed.
2. Make the case to North Korea on the technological advantages of being a Non-Proliferation Treaty (NPT) member.
3. Persuade Pyongyang to return to its self-imposed moratorium on nuclear and missile testing; also convince South Korea not to engage in any military drills to provoke tensions. This two-way process can instill confidence in both Korean counterparts.

These measures could be discussed and analyzed by China, which could sketch out the impact these measures would have on North Korea and the Korean peninsula over the long run. The intersection of strategic competition between China and the U.S. and its allies and North Korea’s growing nuclear capabilities underscores that Pyongyang’s pursuit of its nuclear ambitions has security implications that reverberate not just on the Korean peninsula, but globally as well.

By Jamestown.org

CRIMINAL CAPITALI$M

Fraud Findings Force Trafigura To Fire Head Of Nickel And Cobalt Trading

By ZeroHedge - Feb 10, 2023,

• Trafigura has been forced to fire its head of nickel and cobalt trading.
• 
  
• The giant commodity trader found that metal cargoes it brought in were missing nickel.
• 
  
• Trafigura has recorded a $577 million impairment as a result of the fraud.

The global nickel trading market is once again in the spotlight.

Having been at the epicenter of a massive short-squeeze that almost shuttered the London Metal Exchange (and remains mired in litigation), Bloomberg reports that the nickel market has been rocked once again as one of the world's largest commodity traders, Trafigura Group, is facing more than half a billion dollars in losses after discovering metal cargoes it bought didn’t contain the metal they were supposed to.

The giant commodity trader has recorded a $577 million impairment as a result of the fraud, and fired the group's head of nickel and cobalt trading, Socrates Economou (though the company made it clear that this was a systematic fraud committed against it by an outside party, and does not believe that anyone at the company was complicit in the fraud.).

Trafigura said in a statement that it has started legal action against Indian businessman Prateek Gupta and several companies connected to him including TMT Metals and subsidiaries of UD Trading Group.

“Since late December 2022, a small proportion of the containers purchased from these companies have been inspected as they reached their destination, and were found not to contain nickel,” Trafigura said in the statement.

“The majority of the shipments remain in transit awaiting further inspection.”

This is yet another black mark for the metals-trading industry, which in recent years has been beset by tales of fake warehouse receipts, duplicate shipping documents and containers filled with painted rocks.

Finally, Bloomberg reports that nickel is a popular metal with fraudsters. Its high value means that a single container full can be worth $500,000, yet it is traded in relatively large volumes and without the strict security that accompanies shipments of precious metals like gold.

By Zerohedge.com

Trafigura faces $577 million loss on alleged nickel fraud

Cecilia Jamasmie | February 9, 2023 |

Trafigura found out that some cargoes it had bought didn’t contain the nickel they were supposed to, and spent two months uncovering the scheme. (Image courtesy of Trafigura.)

Commodities trader Trafigura Group will take an almost half a billion dollars charge in first half of 2023, after discovering that some nickel cargoes it bought didn’t contain the metal they were supposed to.


The Geneva-based company said the “systematic fraud” was committed by a group of companies connected to and controlled by Indian businessman Prateek Gupta, including TMT Metals and companies owned by Gupta’s UD Trading Group.

“Since late December 2022, a small proportion of the containers purchased from these companies have been inspected as they reached their destination, and were found not to contain nickel,” it said in the statement. “The majority of the shipments remain in transit awaiting further inspection.”

Trafigura noted it had started legal action against Gupta and the involved companies, with which it had traded since 2015.

The $577 million impairment could end up being lower if the metals and energy trader is able to recover some funds.

It could become a major blow to Trafigura’s earnings, as it is equivalent to more than 7% of the record $7-billion profit the company made in its 2022 financial year.

Trafigura said it had found no evidence to suggest that anyone at the company was involved or complicit in this illegal activity.

Nickel prices have soared due to worries about supplies from major producer Russia after it invaded Ukraine in 2022. They are currently trading at around $27,000 per tonne compared with $9,000 for copper.

The metal, in high demand from the electric vehicles sector for its use in the batteries that power them, has also climbed due to the cutting of large short positions, or bets on lower nickel prices. This culminated in March last year in chaotic trade, with prices soaring above $100,000 a tonne in a matter of hours.

Missing metals from orders is, unfortunately, nothing new. In 2014, “unfound” copper at China’s port of Qingdao triggered a wave of lawsuits from lenders that had financed traders taking the metal as a collateral.

Most recently, global commodity traders including Glencore (LON: GLEN) and IXM halted shipments to Chinese metals merchant Huludao Ruisheng after nearly half a billion dollars’ worth of copper went “missing” at a storage site in the country’s north.

HIDING IN PLAIN SITE IN UK

Russian metal makes up 42% of LME warehouses’ stocks – report
Reuters | February 9, 2023 | 

Copper warehouse. (Stock image)

The London Metal Exchange (LME) on Thursday noted an expected rise in the share of Russian metal of the stocks in its warehouses, making up 42% of total stocks at 152,841 tonnes but remaining off historical highs.


Last year, the LME decided not to ban Russian metal from being traded and stored in its system because a significant portion of the market still planned to buy the country’s metal in 2023.


A new monthly report by the LME showed that as of Jan. 31, Russian aluminum amounted to 41% of the total at 93,750 tonnes, while copper was 94% at 54,950 tonnes and nickel was 16% at 42,774 tonnes.

“The LME’s conclusion (based on market feedback) that Russian metal continues to be consumed is supported by data on the outflow of Russian metal from LME warehouses,” it said.

“The LME believes that the evolution of Russian stocks is in-line with the market trends as anticipated.”

LME prices of copper and aluminum gained about 1% each on Thursday, while nickel surged 5.6%, buoyed by a slide in the dollar and hopes of demand recovering in China.

The Russia origin share of all three metals rose from October levels, with some traders deciding to refrain from buying Russian brands, the LME said.

However, while the level of Russian copper was just slightly below its historical high of 95% hit in September 2021, aluminum and nickel lagged record peaks by wider margins, the data showed.

The United States is considering raising the import tariff on Russian-made aluminum to 200%, as it seeks to ramp up pressure on Moscow over its war in Ukraine, but a decision has not been made yet, a US official said on Monday.

Most stocks of Russian aluminum were in Asian warehouses, with none in the United States, the LME observed “in the context of market speculation around potential US tariffs on Russian aluminum.”

(By Pratima Desai and Deep Vakil)

UK provides model for LME response to US aluminum tariffs
Bloomberg News | February 7, 2023 | 

Stack of raw aluminum ingot in cargo port. (Stock image)

As the US prepares to impose a punitive tariff on imports of Russian aluminum, traders will be watching for a response from the London Metal Exchange — the home of the global benchmark price. A recent precedent in the UK suggests any impact is likely to be minimal.


When the UK imposed tariffs on Russian metal last year, the LME responded by banning new deliveries of Russian metal into its warehouses in the UK. The move was largely symbolic, because there wasn’t any metal in UK warehouses produced by the affected brands.

The US is preparing to slap a 200% tariff on Russian-made aluminum as soon as this week to keep pressure on Moscow as the one-year anniversary of the invasion of Ukraine nears, Bloomberg reported on Monday.

Should the LME ban deliveries of aluminum into LME warehouses in the US, it would have little market impact, since almost all of the LME’s aluminum stocks are held in Asia. Out of global aluminum stocks of 390,200 tons, less than 1% is located in the US. What’s more, the LME’s off-warrant stock reporting on the LME-deliverable metal held outside its system similarly shows just 2,353 tons of off-warrant aluminum in the US.

An LME spokesperson said: “The LME has robust procedures and the necessary powers in place to take any action that may be required to ensure market stability in response to tariffs that impact the LME market.”

(By Jack Farchy)

US rare earth firm ropes in former top diplomat Pompeo as strategic advisor

Reuters | February 9, 2023 | 

Former US Secretary of State Mike Pompeo. (Photo by Ron Przysucha via Flickr)

USA Rare Earth Llc said on Thursday former US Secretary of State Mike Pompeo has joined the company as a strategic advisor.


“USA Rare Earth’s supply is critically important to reduce foreign dependencies while creating additional American jobs,” Pompeo said.


Rare earth elements form an important part of President Joe Biden’s initiative to transition towards clean energy as they are used in electric vehicles, electronics, and defense industries.

USA Rare Earth, which had planned to go public in 2021, is developing the Round Top rare earths deposit in Texas.

Discoveries related to uranium oxide may support nuclear nonproliferation

Staff Writer | February 10, 2023 | 

Researcher Tyler Spano examines a sample of uranyl nitrate solution that she uses as a precursor to many uranium oxide syntheses. (Image by Carlos Jones/ORNL, US Dept. of Energy).

Researchers at the Oak Ridge National Laboratory examined four previously understudied phases of uranium oxide: beta (β-), delta (δ-), epsilon UO3 (ε-UO3) and beta U3O8 (β-U3O8) and noted that each phase has a unique fingerprint that can reveal when something out of the ordinary happened to lead to its creation, helping organizations such as the International Atomic Energy Agency investigate unintended mistakes or blatant misuse of nuclear material.


Many uranium oxide phases were identified decades ago but had remained loosely understood. The α phase of U3O8, for example, is common, but the β phase is formed under unusual conditions.

Researcher Tyler Spano and her colleagues used analytical methods to observe uranium oxides under different conditions. X-ray diffraction helped them identify the chemical phase of materials. Optical vibrational spectroscopic techniques, such as Raman and infrared, enabled them to observe the chemical structure on shorter length scales, which can be used to identify small quantities of these materials.

“The way UO3 moves through the exotic phases is a little unusual,” head researcher Andrew Miskowiec said. “My team is working on the foundational science to be able to identify these materials if we observe them in the real world and to understand the unusual conditions that led to how they were formed.”

According to Miskowiec, the discoveries from this research also support science beyond national security missions. Specifically, the structure of ε-UO3 is of interest for novel reprocessing methods being investigated elsewhere. The detailed knowledge of the structure of this phase is useful in understanding the material’s physical properties and performing reaction rate measurements.

The scientist pointed out that he and his group will continue to explore new ways to catalogue materials used in the nuclear fuel cycle. For example, the mysterious amorphous phase of UO3 doesn’t have long-range crystallographic order. As a result, the structure can’t be examined using X-ray diffraction, but information can still be obtained from the Raman spectrum.

“Some of these compounds are made from specific processes, which gives us a very specific piece of information,” Miskowiec said. “It’s not only important to identify the compound, but also to have an understanding of its formation conditions.”

Newmont open to sweetening $16.9bn bid for Newcrest – source
Reuters | February 6, 2023 |

Yanacocha mine, in northern Peru’s Cajamarca region.(Image courtesy of Newmont.)

Newmont is open to slightly increasing its $16.9 billion offer for Newcrest Mining, according to a source familiar with management’s thinking, amid concerns its current bid is too low after recent leadership changes at the Australian company.


Already the world’s largest gold producer by market value and ounces produced, Newmont would become a gold mining behemoth should it prevail in its bid for Newcrest. The newly combined company would produce nearly twice as much of the yellow metal as its closest rival Barrick Gold.

News of the deal leaked early Monday in Australia before Newmont had a chance to do full due diligence, but the company is convinced the tie-up would be successful, according to the source. Newmont would be willing to slightly increase its offer and is not worried about being outbid, the source added.

Shares of Newmont fell 4.5% to close Monday at $47.60. Analysts at Jefferies cut their target on Denver-based Newmont by 12% to $50 on the prospects of a bidding war.

IN DEPTH: Mammoth gold miner in the making after Newmont’s $17bn bid for Newcrest

Flossbach von Storch, the Germany-based asset manager, and Newmont’s eighth-largest shareholder, agreed that the two companies would fit well together but said that it was not in favor of Newmont increasing its bid.

“We don’t want to see big premiums paid,” Simon Jäger, investment manager at Flossbach von Storch, told Reuters, adding he expects a “disciplined” approach towards M&A from Newmont.

Newcrest is seeking a replacement for former CEO Sandeep Biswas, who stepped down in December. In the meantime, the outlook for gold prices is improving on expectations that global interest rates will peak this year and then turn down.

If successful, the all-share deal would be the largest mining takeover and the third-largest corporate buyout in Australian history, according to Refinitiv data.

Newcrest, which was spun out of Newmont in the 1990s, has said it is considering the proposal. Newmont described the combination as “a powerful value proposition” but has said little else publicly.

The initial feedback from Newcrest shareholders, though, is that they want a higher price, according to a person familiar with Newcrest’s deliberations.

“A good litmus test for a reasonably-priced deal is one where both seller and buyer feel somewhat aggrieved by selling out too low or by paying too much,” said Simon Mawhinney, chief investment officer at Allan Gray, Newcrest’s largest shareholder with a 7.4% stake. “It’s not clear to me that this kind of symmetry exists with these deal terms.”

Newcrest shares surged on Monday as much as 14.4% to A$25.60, the highest since May 2022, but remained below the implied offer price of $27.16. Shares closed 9.3% higher at A$24.53.

The indicative offer implies a 21% premium to Newcrest’s share price before the bid was announced, materially below the traditional 30% takeover premium, Morningstar analyst Jon Mills wrote in a note to clients. Mills values Newcrest at about A$31 per share.

Newcrest’s operations include its top-class Cadia asset in Australia, an expanding footprint in North America and Papua New Guinea, and growth potential in copper, highly prized as key to the world’s energy transition.

Newcrest shareholders would receive 0.38 Newmont shares for every Newcrest share, giving them a 30% stake in the enlarged miner. It is a 4.7% improvement from a previous offer that was rejected for not providing enough value, Newcrest disclosed on Monday.

Newmont itself fended off an $18 billion hostile bid from Barrick in 2019.

Leadership turnover

Newcrest is expected to announce a new CEO this year after Biswas announced his retirement after eight years.

Sherry Duhe, who joined Newcrest in February 2022 and had served as its chief financial officer, is the interim CEO while a global internal and external search for a replacement is underway.

Newcrest has been viewed as a target in recent years given its middling performance, but only a handful of buyers are big enough to take it out, said an investment banker who was not authorized to speak publicly about the matter.

The all-share nature of the offer meant the timing is more likely to be linked to Newcrest’s leadership vulnerability than a big call on the gold price, but it probably also reflects a constructive view on the precious metal, the banker added.

Newmont peer Sibanye-Stillwater CEO Neal Froneman told Reuters on Monday he was not interested in bidding for a gold company and would focus on building a “geographically diverse green metals company.”

Gold prices fell to two-and-a-half-year lows around $1,615 an ounce last autumn as rising interest rates pushed up bond yields and strengthened the dollar, making gold less attractive to investors.

Prices have since recovered to over $1 850 as markets anticipate the end of rate increases, but most analysts expect gold price gains to be limited while borrowing costs remain high.

(By Melanie Burton, Scott Murdoch, Divya Rajagopal, Sameer Manekar, Helen Reid and Peter Hobson; Editing by Ernest Scheyder and Marguerita Choy)