Australia | Feb 27 2012
– Production at Lihir impacted by technical issues
– Newcrest maintains full year production guidance
– Brokers see risk to the downside for this figure
– Two broker ratings cut to Neutral
By Chris Shaw
Lihir has been a problem asset for Newcrest ((NCM)) for some time and this looks set to continue following the announcement of further production issues at the project. Output will be shut down for 12 days while an autoclave circuit is repaired, a disruption that will impact on March quarter production by as much as 50-60,000 ounces.
As well, JP Morgan notes to fix ongoing electrical and mechanical issues Newcrest has indicated it will lift sustaining capex at Lihir to around $200 million per year for the next few years. This is a level double that previously forecast.
Full year production guidance from Newcrest has been maintained at 2.43-2.55 million ounces, but JP Morgan points out achieving even the bottom end of this guidance will be dependent on how Lihir performs over the course of the year.
Given this risk relative to guidance JP Morgan has lowered its production expectation by 3.6% to 2.42 million ounces. This implies an increase in unit costs to $600 per ounce from $578 per ounce previously. Others have reacted similarly, UBS lowering its output estimate by 13% to 2.395 million ounces at a cost of $595 per ounce, an increase of 11%.
These changes flow through to modest cuts in earnings estimates. BA Merrill Lynch's earnings per share (EPS) forecast for 2012 have been cut by 4.5% to 177c, while UBS has lowered its EPS forecast for 2012 to 194c from 207c previously. Consensus EPS estimates for Newcrest according to the FNArena database stand at 176.5c this year and 268.4c in 2013, with UBS suggesting risk remains to the downside at present.
The ongoing issues at Lihir are now changing how some in the market view Newcrest. Prior to the update the stock had scored a perfect eight-for-eight Buy ratings, but the latest announcement has seen both UBS and JP Morgan downgrade to Neutral recommendations.
For JP Morgan the issue is the increased uncertainty with respect to future growth and cost forecasts means the earnings outlook is not as assured as had previously been assumed. This means the market is likely to wait for a few solid quarterly production results before pricing in Newcrest's growth upside.
UBS agrees, expecting the increased uncertainty over future growth and cost forecasts will likely weigh on the share price for some time. As well, with an upcoming listing on the TSX, Newcrest is likely to now be directly compared to North American peers. Here the stock doesn't look cheap in UBS's view, which supports the cut in rating.
Others remain more confident, as BA-ML for one doesn't expect the current issues at Lihir will impact on what remains a positive long-term growth story at Newcrest. Deutsche Bank also sees enough shorter-term positives to keep investor interest high. These include the upcoming TSX listing, completion of Cadia East by the middle of the year and the PFS for the Wafi-Golpu project due by June.
With changes to earnings estimates relatively modest so too have been changes to price targets. The consensus target for Newcrest according to the FNArena database now stands at $42.59, down from $42.97 previously.
Shares in Newcrest today are weaker and as at 11.30am the stock was down $1.00 or 2.9% at $33.55. Over the past year the stock has traded in a range of $29.51 to $42.92, the current share price implying upside of more than 26% relative to the consensus price target in the database.
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