Less Gold In The Pan For Newcrest

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

Newcrest Mining is likely to face several years of falling gold production as Cadia grades decline, and a delay at Wafi Golpu raises doubts over whether this development will compensate.

-Large capital expenditure requirement to develop Cadia underground
-Delays raise doubts over whether Wafi Golpu will be next major growth project
-Volatility in global markets driving increase in gold price, stocks
 

By Eva Brocklehurst

The Cadia mine has passed its peak. The impending decline of gold grades at this top performing asset was starkly laid out by Newcrest Mining ((NCM)) in the FY19 results. Unfortunately, brokers suspect delays and expenditure requirements at replacement assets are likely to mean an earnings hole opens up. The company reported its lowest annual costs per ounce (AISC) in FY19 after a record year of production at Cadia.

Newcrest has completed the acquisition of its 70% interest in Red Chris and will operate the mine in surrounding tenements in British Columbia, Canada, and aims to unlock significant value in applying its technical expertise in block caving. The mine has potential to host a higher grade deeper block-caving opportunity, but the near-term focus is on achieving operating improvements to stop the cash burn.

Newcrest will provide a briefing on August 21 and Macquarie looks for some clarity on the near-term outlook for Red Chris. Red Chris provides a large-scale development opportunity that could offset some of the uncertainty around the development of Wafi Golpu. All up, UBS assesses Newcrest Mining is a growth stock rather than the yield play as there are many capital projects that are yet to be executed.

Cadia

Macquarie suggests Newcrest is on the cusp of a multi-year trough in production. Expenditure to fully develop the Cadia underground is in the order of US$6.9bn and this, the broker asserts, is being overlooked by the market. Credit Suisse agrees that the capital holiday has ended, citing, in the near term, the US$540m that is required to build the next cave for first production in FY22.

Cadia is being affected by lower grades ahead of schedule and Shaw and Partners points out there is a shut-down planned for the September quarter. Intensive maintenance is occurring at the SAG mill after a failure a couple of years ago.

Gold grades at Cadia are forecast to decrease to 0.6g/t by FY23 from 0.9g/t, while copper grades remain consistent. Guidance is for 760-840,000 ounces in FY20, down from the 913,000 ounces produced in FY19.

UBS expects production will decline towards 500,000 ounces in FY22. The fact that this key asset has peaked, having generated around 70% of operating earnings in FY19, is the main driver of the broker's Sell rating. UBS is of the view the major block cave potential development at Red Chris or Wafi Golpu will not change this peak production scenario until the mid 2020's.

Wafi Golpu

Political issues in PNG have stalled the development of Wafi Golpu, and the decreasing grade at Cadia as well as a cessation of Telfer and Gosowong will result in a declining future production profile for Newcrest.

This was to have been alleviated by the ramping up of Wafi Golpu, but the recent delays have put this in jeopardy. Shaw and Partners points out that the delays at Wafi Golpu are not related to Lihir, which is an operating mine.

The dispute is about allocation of royalties. Credit Suisse surmises that the ultimate capital required for Wafi Golpu could vary significantly depending on the equity arrangement with the PNG government and there are doubts over whether this will be the company's next major growth project.

Gold Upside?

The company has generated significant cash flow, through increased production and lower costs, which has allowed a significant reduction in its debt position. While the Australian dollar gold price is at recent highs, factors contributing to its appreciation remain largely unresolved, Morgans suggests.

The rapid increase in gold prices and gold miner stocks is primarily driven by the expectation that volatility will be a notable feature across global markets in the medium term. As a result, Morgans increases the value attributed to in-situ resources outside of the current mine plan.

The broker upgrades to Hold from Reduce, suspecting the factors that have caused Australian dollar gold price to rally are still unresolved and there may be further upside ahead. Citi goes the other way and downgrades to Sell from Neutral. The broker acknowledges there is upside risk if the gold price continues to move higher, but notes Newcrest Mining's share price has gained 75% over the past year.

Moreover, declining production after FY20 and the amount of capital needed to sustain earnings per shares signal to Citi the medium-term risks are to the downside.

Credit Suisse is relieved there were no additional impairments after the write-down in FY18 of the Namosi investment and the final write-down (perhaps?) of the decision in 2002 to re-invest in Telfer. The broker finds the former even more challenged at current copper prices, but acknowledges it could be an economic means of recovering the large copper-gold resource in future.

Meanwhile, Telfer's outlook is potentially more interesting, subject to continuing good exploration results at satellite Havieron. Telfer has become neutral in terms of cash consumption although this could turn negative because of redundancies and remediation.

Ore sorting trials, if successful, could postpone Telfer's closure, while the recent strength in the Australian dollar gold price supports a more positive outlook, Credit Suisse believes. Meanwhile, Gosowong's contribution has become less meaningful and the asset is unlikely to be sustained in the portfolio.

Shaw and Partners, not one of the seven stockbrokers monitored daily on the FNArena database, has a Hold rating and $30 target. The database has five Sell ratings and one Hold (Morgans) with a consensus target of $26.84 that signals -24.1% upside to the last share price. Targets range from $20.30 (Credit Suisse) to $33.71 (Morgans).

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