Newcrest’s Golden Opportunity Becoming Clearer

Australia | May 27 2020

Uncertainty regarding where the next "gold rush" is coming from has put pressure on Newcrest Mining but several brokers believe the answer may be closer than generally believed.

-Red Chris block cave could transform the project to a tier-1 asset
-Meanwhile, Havieron could enable life extensions at Telfer and buy time
-Balance sheet, theoretically, could handle four potential developments


By Eva Brocklehurst

As gold grades began to decline in the Cadia Valley and earnings appeared to be peaking, Newcrest Mining ((NCM)) ramped up its search for replacement projects. The uncertainty about where the next gold rush was coming from has put pressure on the stock, despite a robust gold price.

However, several brokers believe the answer is close at hand and should return Newcrest to its rightful place as Australia's bellwether gold equity. UBS is interested in what a block cave could provide for the economics of Red Chris (Canada) and what Havieron could do for the ageing Telfer mine (Western Australia). So too is Citi.

UBS analyses both drilling data, timing and expenditure for the two developments. The potential for Red Chris to transition to a block cave by FY27 is looking more likely. While the market may still be thinking about factoring in these developments, UBS has taken the lead, and upgrades Newcrest to Neutral from Sell.

The two projects, Red Chris and Havieron, could materially change market estimates and UBS lifts net present value for Newcrest by 27%. Still, the stock is trading in line with valuation and developments are likely to consume significant amounts of free cash flow for the next five years.

The reason underpinning the broker's outlook is the inclusion of the projects in modelling challenges the perception that production is peaking in 2020-21.

Citi accepts that growth expenditure is seldom well received but if Newcrest delivers on the promise at hand this should push the share price higher. The main problem has been progressing operations, with free cash flow dependent on just two mines.

Regardless of the concerns about asset concentration during Newcrest's attempt to diversify earnings, Citi can envisage a path to sustaining 2.0m ozpa and looks forward to a "rich" flow of news in FY21.

The broker considers the Newcrest tier-1 assets unique, and there is enough potential in the pipeline. Newcrest has targeted five in its portfolio by the end of 2020: Cadia (NSW), Lihir (PNG), Wafi Golpu (PNG) and Fruta del Norte (Ecuador), with Red Chris the fifth.

Citi observes Havieron could be a tier-2 asset and the enabler of mine life extensions at Telfer, while buying time to optimise the economics of a longer-dated Telfer block cave.

Red Chris

Newcrest's plan for Red Chris was to transform the open pit into a block cave. UBS estimates the current open pit mining operation is worth around US$400m and the equity production (70% owned) is not of the scale to fit with the company's strategy.

That said, if a block cave is feasible, production could lift to 200,000 ozpa and 50,000 tpa of copper by 2026. The broker warns its estimates are very preliminary and sensitive to assumptions.

Citi values a 12m tpa block cave at Red Chris at US$2bn, or $3.96 a share unrisked. Moreover, Newcrest has advantages in its extensive block caving experience. The broker also highlights Newcrest's systematic approach to exploration that increases its chances of discoveries.

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