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Newcrest Emerges From Cadia Disruption

Australia | Jul 25 2017

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

Newcrest Mining is emerging from the disruption caused by a seismic event at its Cadia copper/gold mine. Brokers assess the outlook and growth options for the miner.

-Record output at Lihir counters major outage at Cadia
-Stock upgraded, generating strong free cash flow amid undemanding valuation
-Investment in SolGold hailed as a potential growth option

 

By Eva Brocklehurst

Newcrest Mining ((NCM)) is coming out of the woods after June quarter production was impacted by a seismic event at its Cadia copper/gold mine. Brokers believe FY17 turned out to be a reasonable year, all things considered, as record production at Lihir countered the outage at Cadia. Cadia was off-line for most of the June quarter.

Newcrest recently de-rated because of these operating issues, as well as gold price sentiment, but Deutsche Bank observes the company is now generating solid free cash flow and the valuation is undemanding relative to global peers. Hence, the broker upgrades to Hold from Sell.

Ord Minnett also upgrades, to Hold from Lighten, highlighting the record quarterly production at Lihir and praising management for the improvements as this asset has been difficult throughout its life. Cadia production also fared better than the broker expected.

Ord Minnett notes the share price has fallen -10% over the past month yet, despite raising its recommendation, maintains a preference for bulk and base metal stocks over precious metals exposure as these have more attractive free cash flow yield and valuations.

Gold production in the June quarter was -7.8% below the prior quarter while group all-in cash costs (AISC), after normalising for the seismic event, were 26.5% higher. This was driven by higher costs at Cadia, Gosowong and Bonikro, partly offset by lower costs at Lihir and Telfer.

Lihir hit a record for throughput in the June quarter of 14.5mtpa, annualised. This was driven by improvements such as the installation of mill liners and the timing of shutdowns. Although throughput is anticipated to drop under 14mtpa in the September quarter, the sustained annualised target rate of 14mtpa by December is considered on track.

Deutsche Bank notes the company has stated that Bonikro is non-core and a decision to reinvest or sell will be made in the current quarter. The broker has tracked the progress of the Cadia East recovery project and believes risk/reward is now more balanced for both the deposit and the stock more broadly.

Cadia

UBS considers Cadia, NSW, the jewel in the company's portfolio, accounting for two thirds of valuation and one third of normalised production. While the mine has not been compromised by the seismic events, the broker remains cautious about the speed of the ramp-up and the pace of planned expansion beyond FY19.

UBS envisages production growth at Cadia to 900,000 ounces by FY19, supported by grade and the lifting of milling rates. Both of these could be at risk if the speed of the ramp up drags out.

At the present time, the broker observes that outperformance at Lihir is more than covering up for Cadia but maintains a Sell rating, continuing to find better gold exposure in Evolution Mining ((EVN)).

The ramp up at Cadia is critical, Macquarie agrees. Panel cave 2 may be now back in production at Cadia but the broker remains cautious on the stock until full production at the mine can be demonstrated. Panel cave 1 is expected to re-start in the current quarter.

The company has confidently maintained guidance for the cost and recovery process at Cadia but Morgans remains cautious too and expects FY18 margins will be affected. This is the company's most profitable operation and the outage has a large impact on costs, which Morgans notes increased to average US$968/oz in the June quarter from US$713/oz in the prior quarter.

Citi expects an improvement in production in the September quarter and maintains its Neutral call. Costs at Cadia East are expected to remain elevated but the broker flags the fact these are confined to AISC and do not affect the profit & loss statement.

Growth Options

The growth option in the Wafi-Golpu joint venture is continuing to progress, with the JV engaging with the PNG government on the application for a special mining lease. Deutsche Bank expects Newcrest will experience a -10% decline in copper equivalent production through to 2025 and that Wafi-Golpu will be on hold until the fiscal regime is formalised.

Newcrest has taken a 14.5% stake in SolGold and Shaw and Partners observes this company's 85%-owned Cascabel copper discovery in Ecuador is starting to sound like it could rival Rio Tinto's ((RIO)) Oyu Tolgoi.

Deutsche Bank also likes the growth option emanating from the stake in SolGold, agreeing Cascabel has potential to be a globally significant discovery and a viable pathway for Newcrest to increase its copper output over the next 10-15 years.

Shaw and Partners, not one of the eight stockbrokers monitored daily on the FNArena database, has a Buy rating and $22 target. The broker points out that Newcrest has met or surpassed guidance for the past four years, which is an impressive turnaround given its prior track record.

There are now five Hold ratings and three Sell on the database. The consensus target is $19.90, signalling -2.3% downside to the last share price. Targets range from $18.20 (Credit Suisse) to $24.00 (Citi).
 

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