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Stock: Newcrest Mining Limited

Stock code: NCM

Share Price: $37.71 (as at close 01/07/11)

P/E Ratio:  25.42  (Sector P/E 13.14)

Market Cap: $28,864,000,000

Broker Buy Recommendations:

Goldman Sachs – BUY

WilsonHTM – BUY

Novus Capital – BUY

Patersons – BUY

Morningstar – BUY, price target $45.00

Broker Hold Recommendations:

Alto Capital – HOLD, ( 2011, share price was $ that day)

Investor Centre: Newcrest Mining Limited

Company news: Newcrest Mining Limited

Chart: Share price over the year to 01/07/2011

Australia’s biggest gold producer, Newcrest Mining (NCM) has been lucky enough to be smack bang in the middle of a gold boom that has continued unabated for the last decade. And ride the boom it has, with the NCM share price soaring from $5.60 at the beginning of 2003 to an all-time high of $42.66 in mid-April – an almost eight-fold increase in just eight years.

The company is currently in a transitional phase with management – it is looking for a new chief financial officer to replace current CFO Greg Robinson, who takes over the company as chief executive from July 1. The promotion of Robinson from CFO to CEO provides some stability in the changeover period, as the gold giant tries to capitalise on the booming gold price, which has more than doubled in the past three years and is up more than 400% over the past 10 years (see chart below).

Analysts are still bullish on both gold and NCM’s prospects, and predict more of the same as you will see from the analysts’ comments further down.

 #FOTO:1124:400#

Gold price 2000-2011. Source: Kitco.com

Description

Newcrest Mining Limited (NCM) is a quality, low-cost gold and copper producer with its main operations in Australia and Indonesia with other projects in Papua New Guinea and Fiji. NCM owns and operates seven mines – five located in Australia, one in Indonesia and one in Papua New Guinea. According to NCM, all mines are based on the conversion of exploration successes into low cost, long life mines.

About half of NCM’s assets are Australian based which means that there is low sovereign risk. The merger with Lihir merger increased exposure to PNG and Africa but it also raised the proportion of the company’s revenue earned from gold.

Operations

The image below shows that NCM currently has multiple operations in Australia and the Pacific. In addition, NCM is exploring for gold and gold-copper deposits in Australia, Indonesia, Fiji, the United States, Canada and Peru.

#FOTO:1125:400#

Lihir: The mine is located on Lihir Island, PNG, with gold mining scheduled to continue until 2021 at current rates, and then processing of lower grade stockpiles to continue until after 2030. As of September last year the mine had 28.8Moz in reserves and 43Moz in measured and indicated resources.

Telfer: The Telfer mine is located 500km inland from Port Hedland, WA, and produces gold and copper from both open pit and underground mines.

Cracow (JV, 70%): The JV project is located in central Queensland and produces gold with total reserves attributable to NCM of 0.2Moz Au.

Cadia Valley: Cadia Valley is near Orange, NSW and produces both gold and copper. Operations include the large, low grade Cadia Hill open pit mine and the higher grade Ridgeway underground mine. Both projects are located adjacent to each other and share a number of infrastructure facilities and services, which allows the two concentrators to be operated as a single complex. Total resources of 43.7Moz Au and 7.99Mt Cu whilst reserves are 25.6Moz Au and 3.96Mt Cu.

Gosowong (JV, 82.5%): The project is on Halmahera Island, Indonesia. The main operation is the high grade, underground Kencana mine with total reserves of 2.3Moz Au.

Financials & Fundamentals

Newcrest Mining reported NPAT of $437.8m for the half-year ended 31 December 2010, with revenue from ordinary activities at $1.97bn, up 65.6% from the same period last year. Sales revenue was higher due to the merger with Lihir Gold, as well as the commissioning of Hidden Valley, rises at Cadia Valley and Gosowong, and last but not least, steadily increasing gold and copper prices. Net operating cash flow was $922.1m, up from $479.7m last year and the interim dividend was 10 cents, up from 5 cents last year.

Financials for NCM for the past three years:

 

 2008A

2009A

 2010A

 Sales Revenue ($m)

 2371.0 2351.42802.5

 EBITDA ($m)

1037.71039.41435.9

 EBIT ($m)

 759.1772.61127.4

 Reported NPAT ($m)

134.3248.1 556.9

 Price/Earnings

 26.727.721.1

 Dividend Yield (%)

 0.30.50.7

 Net Profit Margin (%)

 20.819.127.3

 ROE (%)

 15.311.215.4

 Net Debt/Equity (%)

 9.01.9-4.3

Link to company Earnings Report: Newcrest Mining Limited Half Year Earnings Report – to December 31st, 2010

Analysts

Gold at US$1,500 an ounce represents good buying if analyst Les Szancer’s prediction of $US2,000 an ounce is met within 18 months. Szancer went out on a limb 14 months ago and predicted gold would rise to $US1,500 an ounce before the end of 2010. It didn’t, but he wasn’t far off, it finished 2010 at US$1,418 an ounce. At the time of his prediction – published on TheBull in February 2010 – gold was trading marginally above US$1,100 an ounce.

Szancer, of Alpha Broking, maintains that what drove gold up in 2010 will push the precious metal higher this year and beyond. Essentially, the positive drivers are gold is a safe haven, it’s a hedge against inflation, it’s an alternative currency, the US dollar is weak and demand, particularly from India and China, is strong. “We consume more gold each year than is produced,” Szancer says. He says the gold price, like almost anything that’s traded, will go up and down, but $US2,000 an ounce within 18 months is “certainly achievable, before it really goes through the roof”.

“Whenever gold has hit new levels, commentators are prone to say, ‘that’s it’ – it cannot go any higher, but it does,” he says. “What other commodity can take its place? Perhaps silver, but you have to own so much more of it compared to bullion, and it doesn’t have the same allure as gold.”

Australia’s biggest listed gold producer Newcrest Mining downgraded full year production after a 16 per cent fall in the first quarter of calendar 2011. It now expects full year production to be 2.82 million ounces, plus or minus 35,000 ounces. Heavy rainfall on Australia’s east coast impacted production, while operations at Bonikro in Cote d’Ivoire were suspended during most of the March quarter due to civil unrest.

However, Szancer views the production fall as a blip against the long-term outlook. Although gold production was lower, the company still produced more than 604,000 ounces for the quarter amid copper production increasing 13 per cent to 20,098 tonnes. Szancer says Newcrest offers long life operating mines and strong exploration prospects. “Newcrest, as an unhedged gold producer, will benefit as I am bullish about gold,” he says. “I view the share price retreat on news of lower production as a buying opportunity in a top gold producer.”

Peter Day, analyst with Wilson HTM also has a buy on the miner. He says that repair work has started on a high voltage switchgear failure at the Lihir power station in Papua New Guinea, which interrupted production and reduced capacity. Day says that a return to full operating capacity is expected over the next three weeks. Day is bullish on NCM’s prospects, pointing to the Wafi-Golpu exploration asset, which he describes as one of the most exciting new gold discoveries worldwide. ‘While it’s taken NCM’s growth path to a new level, it isn’t reflected in the share price,’ Sayd Day. ‘NCM continues to offer excellent exposure to a rising gold price.’

Cleo Nanni from Novus Capital is also a fan of the gold and copper producer. ‘Despite the company downgrading full-year gold production, Newcrest offers ideal exposure to a rising bullion price that’s breached $US1530 an ounce,’ says Nanni. ‘Consider buying this company on any dips below $38 and continue to accumulate at each opportunity.’ James Georges from Patersons also recommends to buy on dips. ‘As a low cost quality gold producer, this stock has offered good returns amid a buoyant gold price,’ says Georges. He believes that at the right price, NCM is a cornerstone gold stock for any portfolio.

Gold aside, it escapes most investors’ attention that NCM is also a large copper producer. Hamza Habib, associate adviser at Patersons Securities, expects an improving global economy to drive copper demand beyond supply. “For 2011, the market is expecting a copper supply deficit above 444,000 tonnes,” he says. “This is subject to change depending on the speed of the global recovery.”  Habib says in December 2010, Newcrest sold 37,000 tonnes of copper, generating $303 million in revenue. “Newcrest has almost doubled its capital expenditure on current projects and has also ramped up investment for further exploration,” Habib says. “Both, the company’s robust balance sheet and diversified operations across Australia, Indonesia, Papua New Guinea and Fiji present significant growth for years to come.”

Brett Schreuders from Alto Capital has a hold on the gold and copper miner, admitting that with global uncertainties persisting, the outlook for gold remains robust. ‘NCM remains Australia’s premier gold stock, with low cost production, good exploration upside and strong growth potential,’ says Schreuders. ‘The merger with Lihir Gold last year increases exposure to West Africa and Papua New Guinea, but with half its assets in Australia, the sovereign risk for NCM remains reasonably low for investors wanting exposure to gold.’

Reuters analyst consensus is a BUY across 18 analysts, with 11 buys, 6 outperforms, 1 hold, 0 sells.

Conclusion

While the merger with Lihir Gold has increased NCM’s soverign risk, it has also increased its exposure to gold. And with a booming gold price showing no signs of weakness as global uncertainties remain, investors could do worse than to consider NCM as part of their portfolio. With plenty of analysts bullish on the stock and institutional investors jumping on board, there is a lot of the right type of interest in NCM.

 

>>Back to the newsletter to view other articles – July 2nd 2011

 

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