Production Rumbles For Newcrest’s Cadia

Australia | Apr 19 2017

Brokers assess the early impact on Newcrest Mining's flagship gold operation, Cadia, where mining has been suspended because of an earthquake.

-Gold production, earnings forecasts reduced but exact outcome unclear as yet
-Underground mining expected to be suspended for at least four weeks
-Recent gold price strength supportive but is the stock fair value?


By Eva Brocklehurst

Newcrest Mining's ((NCM)) flagship gold operation, Cadia in NSW, has been rocked by a nearby earthquake, with mining operations suspended since April 14. The plant continues to operate, although Cadia East stockpiles will be depleted by today. Both Cadia East PC1 and PC2 mines have sustained damage. As a result Cadia is not expected to meet full year guidance for 730-820,000 ounces of gold and 65-70,000 tonnes of copper.

Macquarie reduces forecasts for gold production by -13% and copper production by -11%. The broker notes Cadia East is currently in a critical phase of its development as the PC2 moves into PC1. This process was expected to be completed before the end of FY17 and assessing the impact of the seismic event on the cave will be the main focus over the next few weeks.

Macquarie makes only modest adjustments to FY18 assumptions while reducing FY17 earnings forecasts for Cadia by -18%. The broker suspects some risk for the ramping back to full production, depending on the damage to the underground infrastructure and the cave itself.

Cadia's Value

Cadia accounted for around 31% of Newcrest's FY17 production guidance, prior to the seismic event, and 67% of UBS growth asset value estimates. In the December half year, the mine accounted for 56% of the company's free cash flow. Every month of lost production risks around 70,000 ounces or -9% to the broker's earnings estimates.

While the company's two main assets, Cadia and Lihir, are world-class, the broker does not believe Newcrest has enough diversity in its operations relative to peers. Offsetting this seismic event, increasing geopolitical tensions could mean interest in gold increases and elevates the value of the stock, UBS suggests. Nevertheless, the broker finds better risk/reward elsewhere in the sector and retains a Sell recommendation.

Deutsche Bank downgrades production forecasts by -10%, suspecting underground mining activities will be suspended for four weeks and there will be a following four week ramp-up back to full operations. FY17 earnings estimates are reduced by -15%, such as the significance of Cadia to the group.

The broker finds the timing of the event unfortunate, given the release of the Cadia expansion pre-feasibility study is imminent. This also raises a question regarding the potential impact of higher mining rates.

Assuming one month is lost, Morgan Stanley's production estimates for Cadia drop to 37,000 ounces, which is 5% of the asset and 1.4% of the group total. Because Cadia is the lowest-cost operation in the group the impact on FY17 earnings per share is expected to be around -4%. The outage has potential to affect sentiment in the short term but should not significantly alter the fundamental valuation, in the broker's opinion, provided normal operations resume soon.

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