Newcrest Outlines Growth Ambitions

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Gold and copper miner Newcrest has provided further clarity on growth plans for its key producing mines. Not all brokers are convinced.

-Options being considered to lift Cadia output to, potentially, 40mtpa
-Rising cost profile at Lihir and more work required to firm up viability of 17mtpa
-CEO suggests US-based investors find deep value in the stock, brokers less convinced
 

By Eva Brocklehurst

Gold and copper miner Newcrest Mining ((NCM)) has put more flesh on the bones of its key producing mines, ahead of site tours to Cadia Valley and Lihir Island, with further clarity on the growth plans for the two sites.

Newcrest is on track to hit its 13mtpa target for Lihir and has lifted this goal to 14mtpa by December 2017. The company also provided a more detailed grade profile for Cadia East for the medium and long term, with a focus on options to lift throughput rates to, potentially, 40mtpa.

Ord Minnett observes Newcrest continues to prioritise internal growth opportunities, by reducing bottlenecks and expanding core assets, while acknowledging a desire for more development-stage assets in its portfolio. The broker suspects throughput and grade at Cadia could be weaker than consensus estimates.

No constraints were identified in the expansion of Cadia to 32mtpa but issues with permits, tailings and water need solving in a 40mtpa scenario. The company expects to achieve a 28mtpa rate by FY18.

At Lihir the conceptual target of 17mtpa involves a fines bypass crusher and scrubber and needs more metallurgical work, in the broker's opinion, to firm up the viability of the option. Ord Minnett forecasts a rising cost profile at Lihir, as grades decline and material movement increases, noting the company can combat rising costs by increasing throughput and completing the fines bypass project.

Meanwhile, Newcrest has committed to invest in its Telfer mine until FY19, ahead of a future decision to proceed with the $70-90m in cut-backs required from FY19 onwards.

Macquarie welcomes the detailed guidance, believing this presents upside risks to its base case forecast, but retains a Neutral rating. The indicative mine plans broadly match its forecasts and the upgrade profile presents upside risk for the next six years for production, and downside risk beyond that.

There was also more details on the life-of-mine guidance for other operations, which highlight the comparatively short life compared with the two core assets. The outlook for Telfer was mixed, the broker notes, with higher grades in the open pit offset by lower throughput rates and lower grades from the underground.

Guidance for Gosowong and Bonikro highlight the comparatively short life of these projects. Overall, FY17 guidance is unchanged for gold and copper production, costs and capital expenditure.

UBS understands why the operation of of the company's projects has improved over the last two years. Big data, the EDGE program and an overhaul of the approach to safety have all contributed to the turnaround. Yet, while the outlook and confidence have improved, it still does not justify a premium valuation, in the broker's opinion.

The CEO has suggested that some US-based investors find deep value in the stock, and that a marketing push into the US in 2017 is on the cards. UBS counters this with the observation that while Newcrest might appear favourable on a simple enterprise value/reserve metric, a large part of its reserves are tied up in undeveloped, or long-life, assets, which carry a good deal of uncertainty. This, subsequently, makes a high-level comparison for the company quite difficult.

The main new piece of new information, the broker notes, was the grade profile at Cadia East. Near-term earnings are expected to improve at Cadia but UBS calculates that after FY18, grades decline steadily to 0.54-0.57g/t gold by 2023/25. This would mean annual production halves to 430-460, 000ozs per annum. Copper grades are maintained over this period and, at spot prices, this should mean the revenue mix shifts to 55% gold from the current 70%.

UBS observes this production decline includes expansion to 32mtpa in 2020. With a declining production profile in view, it appears clear to the broker why the company is keeping its options open on expanding to 40mtpa. The broker's target and Sell rating are based on a long-term decline in the company's production profile, amid concern that the market may not be pricing in the size of this decline.

Deutsche Bank notes the focus is returning to growth and believes Cadia provides one of the best growth options in the global gold space, while acknowledging the strategy at Lihir is less certain. The case for expansion at Cadia is contingent on the Cadia East panel cave operation being able to deliver at the required rate but, overall, the broker supports the company's desire to assess the potential to push to 40mtpa.

Deutsche Bank notes the merger and acquisition conversation is strengthening, and believes the company's caving expertise is a point of difference and could be a critical element when justifying transactions, such as buying into an open pit asset where there is caving potential at depth.

FNArena's database shows two Buy ratings, one Hold and five Sell. The consensus target is $20.96, signalling 1.2% upside to the last share price. Targets range from $12.25 (UBS) to $27.05 (Morgans not yet updated on the investor briefing).
 

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