Shares of Newcrest Mining [ASX:NCM] have been relatively flat since march. Today the share price closed at $10.99 and up 4.97%.
Newcrest is Australia’s largest gold producer, and a top five global gold company by output. It owns a portfolio of assets, including the world class Cadia Valley mine. Cadia will be Australia’s largest underground mine and one of the largest in the world.
Newcrest shares followed last night’s upwards move in the gold price.
Gold shot up US$17.30, carrying it above the psychologically important US$1,300 per ounce level. It closed the night at US$1305.90 per ounce. The gold price has been struggling to get momentum over the past month when it briefly touched US$1,330 per ounce. And based on my analysis, gold will head below US$1,000 per ounce heading in 2015.
I’ve provided significant fundamental and technical analysis on this in Diggers and Drillers.
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If I’m correct, Newcrest shareholders will likely be in for a world of pain heading into 2015.
A couple of weeks back, Newcrest announced a $1.5–2.5 billion dollar asset impairment charge to Lihir and a number of its other assets. For a company that seemed to give the appearance that its production issues were in the past, this isn’t good news. In fact, the result will increase Newcrest’s gearing ratio by 3–6%.
Currently, without the impairment charge, Newcrest’s balance sheet remains 30.5% geared at US$4.5 billion. This is at the top of the company’s gearing target range. As you can understand, the impairment, either way you look at it, isn’t good news.
Saying this, production issues do appear to be bottoming out. Production upside is significant, with Cadia East and Lihir gold expansions due to come online in the medium term.
And the company announced that for the June quarter, its gold production was 15% higher than the March quarter. This was paired with an 8% fall in total costs to AU$913 per ounce (US$851 per ounce). It’s important to understand that whilst this is a low total cost, it doesn’t include any financing costs (i.e. interest on debt).
Importantly, Newcrest says that it is now free cash flow positive. Group free cash flow for the year is estimated to be approximately AU$130 million (subject to finalisation of audited financial statements). So the company has delivered on what it set out to achieve — become free cash flow positive.
Newcrest has focused on producing free cash flow for some time now. This is because it wants to reduce its gearing ratio and become a more shareholder friendly company. As such, Newcrest has reduced its capital costs by over 70% since 2012. Next year, capital costs are due to come in at roughly $720 million.
But the company must make a US$1.7 billion dollar debt payment in 2016.
As such, the gold price must remain above its breakeven price of roughly US$1,270 (AU$1,350). At the same time the company is being sued by Slater & Gordon Lawyers for inappropriate market disclosure. This is in regards to the company’s massive $5–6 billion asset write-down last year.
Newcrest’s risk is whether it will be able to generate enough free cash flow to meet its debt obligations over the next two years. At the same time, it risks being slapped with a massive fine from the Slater & Gordon court case.
As I’ve discussed in Money Morning, I’m bearish on the gold price. In this case, the volatile gold price remains the biggest risk for punters.
Jason Stevenson+
Resources Analyst, Money Morning
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