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Treasure Chest: Takeover Appeal In Newcrest?

Treasure Chest | Jun 05 2018

Buying Newcrest may be a better option for a large-cap gold producer, rather than trying to discover and define gold resources, Citi suggests.

-Value relative to replacement cost provides a high takeover appeal
-Since 2000 gold equities have underperformed a rising gold price
-Tailings issues remain a challenge for the company


By Eva Brocklehurst

Would it be cheaper to buy Newcrest ((NCM)) than build it? Citi believes so. The stock is trading at a -71% enterprise value/reserve discount to its peers because of, in the broker's opinion, temporary issues with its operations as well as the concentration of production at key assets.

Hence, buying the company could be a better option than trying to discover and define gold resources. The value relative to replacement cost provides a high takeover appeal. The broker's calculations centre around the cost to find gold and the required capital expenditure for production.

On average it costs US$45/oz to find gold and around US$90/oz in capital to reach production. Citi surmises that it could cost 107% of Newcrest's enterprise value to develop the company from scratch.

A global production shortfall is looming and many miners do not have development options available. The broker estimates, further, that it would require US$130bn of capital to sustain gold output globally until 2026, which could require dubious projects to be given the green light.

Moreover, since 2000, gold equities have underperformed a rising gold price. Hence, the broker considers Newcrest is the answer for any large-cap gold producer. Furthermore, the in-ground multiples fundamentally undervalue the company.

It would not be possible, Citi believes, to reconstruct a company with as much gold as Newcrest has for anywhere near its market valuation. The broker estimates the company's replacement cost is US$28.5bn.

Cadia East, Lihir, Telfer and Gosowong are in production. Wafi Golpu and Fruita del Norte are gold discoveries and require just the cost of discovery to be replaced, although Citi notes this would undervalue completed studies and construction.

Ord Minnett, with an Accumulate rating, is the only other stockbroker monitored daily on the FNArena database that is positive about the value in the stock.

The broker is relieved that Cadia is now full steam ahead after its earthquake-related issues and positive about the company's target of 550-600,000 ozs from the asset for FY18.

Alternative View

Credit Suisse has a Neutral view on a valuation basis, as Newcrest emerges from reliability issues at two of its core operations, Cadia and Lihir.

Tailings have emerged as a challenge for the company in several respects, notably Cadia's dam failure, while Lihir uses submarine tailings disposal (the same as proposed for Golpu) and this, in the broker's opinion, makes the company un-investable for many ESG (environmental, social and governance) funds.

Credit Suisse also suggests that Lihir and Cadia are losing too much gold to tailings from lower metallurgical recoveries. Meanwhile Gosowong is depleting fast and there appears to be no incentive to recapitalise the mine.

Macquarie awaits catalysts such as the Cadia East pre-feasibility and plant expansion studies in August. The broker, which rates Newcrest Underperform, notes several developments over coming days have potential to impact gold and gold equities. These include the upcoming US Federal Reserve and European Central Bank meetings as well as political developments in Europe and Korea.

FNArena's database shows two Buy ratings, four Hold and two Sell for Newcrest. The consensus target is $21.07, suggesting 0.3% upside to the last share price.

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