Newcrest Burnishes Growth Options

This story features NEWCREST MINING LIMITED. For more info SHARE ANALYSIS: NCM

Brokers welcome technical advances that Newcrest Mining has made to underpin the productive life of several of its gold mines.

-Lihir and Gosowong need to perform better to achieve targets
-Proportion of copper revenue likely lifting to 40% by 2027
-Significantly more positive outlook for Cadia
 

By Eva Brocklehurst

Newcrest Mining ((NCM)) expects a stronger second half, as production issues at Lihir have been overcome and recoveries are being lifted at Cadia. Brokers also welcome the technical advances the company has made in underpinning the life of several of its mines.

September quarter production results were softer than many brokers expected, with planned maintenance at Lihir the main reason. Further gold recovery opportunities have now been identified and Credit Suisse points out there are multiple avenues to achieve Lihir's target of 17mtpa. The broker calculates that modest capital expenditure on additional flotation could add 1-2.5% to recoveries while higher expenditure on tertiary grinding could add 2-3%.

Yet, Macquarie believes both Lihir and Gosowong need to perform better to achieve targets. Gosowong was -10% below forecasts because of lower mill throughput. UBS remains sceptical too, capping Lihir production at 15mtpa of throughput. Challenging mining conditions are affecting the company's ability to sustain the run rate at Lihir, although the broker accepts there is increasing evidence in recent years of a turnaround.

The company has gone to some length, Ord Minnett notes, to outline growth options that allow for average production of more than 2.5m ounces of gold equivalent for the next 15 years and costs should fall once Golpu is fully operational.

UBS acknowledges it has been valuing Newcrest's business with a -10% discount rate but this approach can undervalue the long mine life at the three key assets, Cadia, Lihir and Golpu. Using a -5% discount better highlights the differentiation against global peers, which generally have mine lives of 10-15 years.

The broker upgrades to Neutral from Sell but remains concerned about production and earnings momentum. Production and earnings will peak in the next two years because of the grade decline at Cadia, before Golpu enters production in the mid 2020s.

Moreover, Golpu will also require significant expenditure prior to first production. The broker also reduces gold and copper price forecasts for FY19-20, which translate to reductions in FY19 operating earnings estimates of -11%.

UBS models the company's copper revenue lifting to around 40% by 2027/28, from 15% currently, which may mean that investors apply a higher cost of capital over time. Gold assets tend to trade at around a -5% discount rate while copper assets can trade at around -10%. The company's Golpu mine is a copper mine, with revenue split of 75/25 copper/gold and Cadia is a gold mine, with its copper split lifting over time.

Cadia

Cadia is now a positive story, Ord Minnett suggests. Management has been able to dispel market concerns regarding mining-induced seismicity as the cause of the tailings dam failure in April. The northern tailings dam wall has been stabilised and the company has almost 10 years of storage capacity to repair the wall or find an alternative option.

After a negative reaction to recovery estimates in August the company has now disclosed it can maintain recoveries of 77-79% at Cadia for the next 50 years. The breakthrough, the broker suspects, is the coarse ore flotation. Meanwhile, Newcrest has visited block caving operations around the world and peers are now visiting Cadia to learn more about the company's advances with hydro fracturing in order to diffuse geotechnical stress points.

Telfer

Citi suggests Telfer is problematic. There were unplanned outages to the water system and tailings thickener in the quarter. Still, Telfer is expected to meet guidance for gold production in FY19. Telfer, while important to production, being 20% of the ounces expected in FY19, is not so significant for earnings and is likely, the broker suspects, to be divested in the medium term.

Macquarie believes Telfer's future remains difficult to assess, because costs are well above the gold price. All in sustainable costs (AISC) of US$1545/oz were disappointingly 33% above the broker's forecasts and largely attributable to increased waste movement in the open pit.

On the positive side, management has noted a large resource base at Telfer allows time to optimise the asset and ore sorting trials could provide a new lease on life. A selective sorting trial over three months has shown up to 80% of gold in scats can be recovered. Ord Minnett suggests the main game-changer would be a positive outcome on complete ore sorting, noting trials are underway.

FNArena's database shows three Buy ratings, four Hold and one Sell (Macquarie). The consensus target is $21.19, indicating 1.5% upside to the last share price. This compares with $20.39 ahead of the quarterly update and investor briefing.Targets range from $16.00 (Macquarie) to $24.40 (Citi).

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