Newcrest Overvalued?

This story features NEWCREST MINING LIMITED, and other companies. For more info SHARE ANALYSIS: NCM

-Higher capex, costs likely in June qtr
-Are assumptions optimistic?
-Question over Lihir grades
 

By Eva Brocklehurst

While gold sector leader Newcrest Mining ((NCM)) delivered a solid March quarter, brokers question whether the share price factors in too much upside.

Positive revisions at Cadia and Lihir were offset by lower production at other operations and the stoppage at Gosowong. March quarter gold production was 637,000 ozs, with all-in sustainable costs (AISC) of US$723/oz.

The sustainability of the company's performance at Cadia and Lihir is paramount, Deutsche Bank maintains, given the uncertainty at other smaller assets. Both Cadia and Lihir performed well on ore milled in the quarter while Lihir had higher than expected grades.

Lihir and Cadia delivered 5-6% more gold than Deutsche Bank expected, whilst Hidden Valley benefited from a return to open pit mining, which appears to have targeted a small higher grade zone. The broker observes the cost performance at Hidden Valley was impressive, moving to an AISC of US$542/oz from US$1,589/oz in the December quarter.

Deutsche Bank acknowledges a number of optimistic assumptions leading into FY17, expecting improvements at a number of assets including a significant lift in milling rates at Cadia and Lihir. Yet, regardless of lower costs in coming years and realistic mine life expectations, the broker believes the stock is expensive and retains a Sell rating.

Production guidance for FY16 remains at 2.4-2.5m ozs, despite ongoing disruptions at Gosowong and downgrades at Telfer and Hidden Valley. Yet, with just 53% of stripping capex and 68% of sustaining capex spent in the year to date, Deutsche Bank notes guidance also implies a lift in spending in the June quarter and higher AISC.

UBS calculates a 3.5% lift in production is required in the June quarter to meet the mid point of guidance and remains confident Newcrest can meet or exceed its targets. At Cadia, the Ridgeway deposit, now mothballed, is being replaced with higher grade ore from Cadia East. UBS notes Cadia East ore accounted for 94% of mill feed compared with a 2016 average of 66%.

The broker is forecasting 1.2g/t in FY17 but acknowledges this could prove conservative. Grades are expected to moderate after FY17. Offsetting this is the ramp up of Cadia East and longer term plans to expand to 32mtpa.

The broker suspects investor attention on the stock will remain high and retains a Sell rating on valuation grounds, believing that while the operational performance is improving the risk/reward outlook is unfavourable.

Ord Minnett disagrees and considers the company, operationally, may have turned a corner. The broker suggests the stock may be expensive on a pure net present value calculation but global investors pay more heed to how the company compares with its peer group. On that basis a Neutral rating is maintained, as the stock is trading on multiples that are broadly in line with global peers.

There is just one Buy rating on FNArena's database for Newcrest, from Citi. The broker likes the ramp up at Cadia and the improved production outlook across the major operations and is holding out for a dividend in FY16.

Production was ahead of Morgan Stanley's estimates too, driven by Cadia. Yet the grades at Lihir are a concern, with the 3.7g/t mined at the pit well above reserve grades, although the blend of pit to stockpile material is moving closer to 50:50.

While production guidance is unchanged it is predicated primarily on the back of increased expectations for Lihir, and the broker maintains the lift needs to be driven by more than just throughput and recovery. Assuming a 50:50 ex pit to stockpile split, an 80% recovery and 13mtpa throughput, this implies pit grades in excess of these 3.7g/t grades.

Lihir instability continues to be an issue for Macquarie. While production was better than expected the fall in gold recoveries to 71% reflected the need to bypass the autoclave. Front end throughput is now at the target 13mtpa, but the broker believes maintaining a stable rate is a challenge and presents a key risk to forecasts.

Delivering on the optimised targets at Lihir is important in order to unlock the value inherent in the 28m ozs reserve and Macquarie retains a Neutral rating given the pending production risks. The broker prefers to play gold through Evolution Mining ((EVN)) and St Barbara ((SBM)).

Credit Suisse on the other hand believes Newcrest is getting on top of its plant reliability issue at Lihir and is now delivering a more consistent performance, towards the aspirational throughput rate of 15mtpa. Acknowledging reliability is key, the June quarter is expected to be stronger.

The main negative for Credit Suisse in the quarter was the event at Gosowong, where all production at Toguraci and Kencana ceased on February 8. Toguraci has since re-commenced but Kencana remains idled while remediation continues.

The broker notes there is no information on how much additional capital has been spent on rehabilitation. While Gosowong is a small and declining part of the portfolio, the broker is disappointed Kencana is suspended with no guidance for a re-start data or rehabilitation costs.

Besides Citi's Buy there are two Hold ratings and four Sell on the database. The consensus target is $14.63, suggesting 19.0% downside to the last share price. Targets range from $8.71 (UBS) to $20.50 (Citi).
 

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