Australia | Apr 26 2012
– Newcrest downgrades production guidance, again
– More than just wet weather involved
– Sentiment is poor and growth prospects have become irrelevant
By Greg Peel
Over the past twelve months, the price of Aussie dollar gold has risen 14% and the share price of Australia's major global gold miner has fallen 38%. Over five years, Newcrest Mining ((NCM)) shares have risen 8% while Aussie dollar gold has risen 100%.
Doesn't seem right really, does it?
Perhaps what such relativities best illustrate is that gold mining is a risky and costly business and those factors impede the share price of a gold miner, even to the point of all benefit of a rising gold price being lost. Newcrest also mines copper, of course, but investors don't buy what is far and away Australia's largest listed gold play for the copper. They buy it for the gold. Throughout history, share price movements of global gold miners have always lagged gold price movements, and that is the argument being put up today – be patient, for there must be share price upside.
It is little wonder that when the first gold exchange-traded funds were listed in the US early last decade, they surged in popularity. Previously the only way to invest in gold was to invest in gold miner shares, if the futures market seemed too scary. The volume of gold held in ETFs is now arguably the most influential force upon the spot gold price, with central bank transactions taking a back seat and jewellery-related buying providing more of a steady undertone.
Ironically the first ever ETF was listed in Australia – on gold – and it still exists (ASX code: GOLD).
Whereas every global gold miner has to face issues of resource and grade, production difficulties, machinery issues, weather hold-ups, hedging losses and so forth, Newcrest just seems to be the world's poster boy for problems. For many recent years, the big Telfer mine seemed a perennial recalcitrant. At least then Newcrest could take heart in knowing Australian-listed peer Lihir was having its own set of seemingly never ending problems over on Lihir Island. But then Newcrest acquired Lihir to become one of the world's biggest gold companies, and in so doing inherited yet another problem child.
More recently however, Newcrest has secured one of the world's most promising new gold resources in the form of Wafi-Golpu in PNG. To say that analysts are excited about Wafi would be an understatement. It's just as well because issues with Newcrest's other various projects mean an otherwise uninspiring investment opportunity. There remain expansion expectations for Lihir and Cadia in particular but Wafi, although yet to see the release of its pre-feasibility study, is somewhat of the jewel in the crown.
And that's mostly why five of the eight brokers in the FNArena database rate Newcrest a Buy. Yet clearly the market is struggling to agree. The problem is that Newcrest has had a long history of production disappointment and continual downgrades to production guidance. Wafi-Schmafi. Until the company can deliver on its expectations instead of constantly causing heartbreak then it appears the market is simply not interested, no matter its view on gold. And on that point, it's hard to find an analysts who isn't longer term bullish on gold.
Earlier in the week Newcrest released its March quarter production report and guess what? Yep – another guidance downgrade. The company, like many other resource sector companies reporting on March, has been able to shrug the downgrade off to bad weather, both locally and in PNG. But on closer inspection, analysts believe there's something about more sinister about this downgrade than just the rain.
Mind you, you'd think stock analysts had never seen rain before, given the level of “surprise” over the course of this quarterly resource sector reporting season. Do they never look out the window? Many a miner has “disappointed” and forced earnings forecast downgrades over wet weather that occurred for three months and, to my recollection, was often on the tele. Yet as Goldman Sachs notes, management did not just reduce production guidance due to weather but also due to a slower than expected ramp-up of Newcrest's two key expansion projects – at the Cadia East underground mine and for the Lihir “million ounce plant upgrade”, or MOPU.
Newcrest has now “rebased” its production growth guidance (5-10%) to 2.3moz from 2.7moz which implies a downgrade of 15%, JP Morgan notes. The market had already to some extent factored in an expectation that a downgrade was coming, but JPM notes FY13 capex guidance of $1.8bn is money that will not be spent on growth. Volume growth, notes Goldmans, has effectively been delayed again, from FY13 to FY14.
Newcrest had previously declared a five-year plan for the company that assumed a target production level of 3.5moz. The company is currently reviewing that plan and Citi assumes a revised plan will be delivered during result season in August. Citi sees downside risk to longer term guidance.
It will not have helped that the US dollar gold price has come well of its peak over US$1900/oz and since stagnated at the US$1650/oz level. While analysts still favour gold on the back of the amount of monetary policy stimulus going on around the globe (meeting lack of any major global production growth), right now, as QE3 expectations fade, the excitement has died down. For those looking to invest in gold via Newcrest, there seems little near term impetus.
Which is largely as the analysts see it. The market will ignore Newcrest's longer term growth opportunities, no matter how promising, until the company can for once show it can deliver on expectations with nearer term projects. The “blue sky” potential will be ignored, suggests RBS, and signs of improved production sought.
Those five Buy ratings remain in the database, with the embedded value in Newcrest's growth assets and Newcrest's share price undeperformance being the underlying theme. Three brokers in the database are on Hold given a lack of any near term catalysts. There are no sells. Ex-database broker Goldman Sachs has downgraded to Hold (Neutral) after slashing its target price for NCM.
Indeed in the wake of the March quarter production report and guidance downgrade, the consensus target price in the database for Newcrest has fallen to $35.31 from $38.75, following a slew of earnings forecast cuts. Mind you, that still suggests 36% upside.
Which might beg the question: why aren't all the brokers on Buy? The answer is that those brokers applying more subjective ratings (rather than simple target-related ratings) take into account market sentiment.
And for Newcrest, it's bottom of the barrel stuff.
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