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Fund manager stock pick: Newcrest Mining Limited
Current share price: Newcrest-$32.70
Fund manager: Andrew Hamilton, Portfolio Partners

Recently flagged expansion plans, a strong last quarter and the current gold surge has netted Newcrest Mining, Australia’s largest listed gold miner, a gold star in the eyes of Portfolio Partners’ Long/Short Sustainability Trust co-manger, Andrew Hamilton.

Newcrest is now trading $32.70, after rising from an “equivalent” price of $21 (the company had a capital raising during the quarter and sold extra shares) to $28 between June 30 and September 30.

Where it goes from here, Hamilton can’t say: company policy restrains him from offering a 12-month forecast on the stock. But the fund manager likes Newcrest enough to overweight the company in the fund. 

One of the main reasons for the good share price performance last quarter was that it undertook a rights issue to shareholders, Hamilton points out. “That meant that existing shareholders had the right to buy additional shares at a cost lower than the market price in order to give the company more capital so it could buy back hedging positions it had on gold.”

Newcrest had been forced to hedge the gold price to provide a floor of revenue to fund its Telfer mine in Western Australia – meaning that it could not profit from the rising gold price. To facilitate the unwinding of the hedges, the company undertook a rights issue, giving shareholders the right to buy shares. “Buying back the hedges means Newcrest can now sell gold at the prevailing market price, which the market obviously liked because the share price is so strong,” says Hamilton.

Newcrest Mining owns or has stakes in gold and copper mining operations in Australia and Indonesia. Its mines in stgelopment or production include Cadia Hill, Cracow, Ridgeway, Toguraci, and Telfer. The company also has exploration projects in Australia, Asia, and the Americas (including interests in Nevada). Newcrest Mining produces more than 1.5 million ounces of gold and 100,000 tons of copper annually and controls reserves of 33 million ounces of gold and about 2.5 million ton of copper.

Newcrest Mining was formed by the 1990 merger of Newmont Australia Limited and BHP Gold Mines.

Part of the reason Hamilton favours Newcrest is because the company has been the world’s most successful gold explorer for over a decade.

Most other large gold companies grow their production by buying other mining companies and while Newcrest has just announced its intention to expand through acquisitions. Managing director, Ian Smith, said at the annual meeting last week that the company planned to “look at every value-accretive M&A opportunity available throughout the world”. Portfolio Partner’s Hamilton applauds Newcrest’s successful record of “drilling holes and discovering more reserves, which means employing good geologists and technical teams”.

“If you believe that the proof is in the pudding, their discoveries over the last decade say it all,” he says.

JP Morgan has downgraded reported earnings in FY08E and FY09E by 3% and 1% respectively.

The Long/Short Sustainability Trust, which launched in 2006, adds sustainability research, in an ESG (Environmental, Social and Governance) framework, to traditional financial research to achieve what Hamilton refers to as “a true holistic valuation”.

Stressing that there are always risks entailed in investing in resource companies, he says that apart from pure financials like the gold price and the company’s production costs, the Long/Short Sustainability Trust has looked at Newcrest Mining’s occupational health and safety record, use of resources – including water and the quality of its sustainability reporting and ticked all the boxes.

“Its environmental management systems are sound, it has good safety practices and it has discovered resources on its books that it will hopefully turn into mines and exploit,” he says.