Newcrest Offers Clarity On Cadia’s Future

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

Newcrest Mining indicates the future of its Cadia gold mine has not been compromised by the recent earthquake. Brokers welcome the update, although lingering concerns exist.

-Remediation work to be completed with no impact on production beyond Sept quarter
-FY18 production guidance may prove conservative
-Path to full production defined, hence market cap may improve
 

By Eva Brocklehurst

Newcrest Mining ((NCM)) indicates the longer term outlook for its Cadia gold mine has not been compromised after the recent earthquake. The company expects most of the remediation work to be completed in the September quarter when, at that stage, the NSW Mining Inspectorate can release the prohibition notice.

Brokers welcome the greater clarity, as the mine provides 35-40% of the company's revenue and 45-50% of its operating earnings (EBITDA). The company has informed the market that no permanent damage occurred to underground infrastructure and the mine is expected to produce 650-750,000 ounces in FY18, with the cost of rehabilitation estimated at US$25m.

The company believes production will only be affected in the fourth quarter of FY17 and the first quarter of FY18.

Credit Suisse has some problem with the numbers. The broker believes FY18 guidance, if there was no downgrade, should have been above the FY17 initial guidance of 730-820,000 ozs, as ore production from the higher grade Panel Cave 2 increases, displacing lower-grade stockpiles and increasing feed.

The broker suspects the FY18 estimate is deliberately conservative and there is a high probability it is revised higher. Meanwhile, remediation and upgrade costs are consistent with the broker's assumptions.

Production guidance includes the use of stockpiles and some ore from Ridgeway and UBS calculates the volume of stockpile available has increased to 20mt from 5mt, helping to ensure the mill is full in FY18. On the broker's estimates, if no stockpile usage is assumed, production forecasts fall to 460,000 ozs. Furthermore, blending with Cadia underground ore remains hard to estimate and this masks the pace of the ramp-up.

Still, UBS believes the market will look past the production impact on FY18 and take comfort in the fact that the risk to the medium-longer term outlook is now reduced significantly. That said, UBS retains a Sell rating and believes with the risks that remain, Evolution Mining ((EVN)) is a better gold exposure.

Damage

The damage to PC 1 appears less than originally feared, while production from both PC 1 and PC 2 is expected to restart in the September quarter. Brokers observe the ramping back to full production is not without risk and only time will tell if the company's forecasts are accurate.

Morgans has lingering questions about some areas, such as the status of the PC 1 crusher, which was not directly addressed in the update. Even a positive outcome from the remediation timetable will mean reduced ounces and higher unit costs and this will affect cash flow, in the broker's opinion.

Macquarie suspects the company will inject additional capital into the underground mine to improve ground support and ensure the mine can handle significant seismic events in future. Meanwhile, the feasibility study on the expansion has been completed and will be reviewed once operations have normalised.

Impact On Market Cap

By the time extraction from the panel caves restarts they will have been idle for 10 weeks, and Morgan Stanley has some concerns about all consolidation and stress-induced damage to the ground support. The broker will watch for commentary regarding these issues as mining resumes.

Since the event, the stock's market capitalisation has fallen -20%, the broker observes. By comparison, the top five domestic peers have fallen on average by -6%.

This suggests -14% of market capitalisation has very removed from Newcrest in relation to the Cadia outage and reflects the importance of the mine to the group and the open-ended nature of the outage, Morgan Stanley believes. Nevertheless, with the path back to normal operations being defined the broker would not be surprised to find the equity recovering some of its lost market capitalisation.

Citi downgraded to Neutral after the quake and retains that recommendation for now. The broker believes the future of this long-life operation is secure and there is only modest risk to FY18 earnings until production restarts. The broker does point out that was another small tremor concurrent with the larger one, and closer to the mine, and this will need to be monitored.

The consensus target on FNArena's database is $19.68, suggesting -4.1% in downside to the last share price. Targets range from $12.68 (UBS) to $24.00 (Citi). There are four Hold ratings and four Sell.
 

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