Australia | May 27 2020
This story features NEWCREST MINING LIMITED. For more info SHARE ANALYSIS: NCM
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.
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.
Macquarie has also fast-tracked high-grade underground development at Red Chris, which boosts its earnings estimates from FY23. Over the next 12 months, UBS expects Newcrest to commit to declines at both projects that should de-risk the potential development.
Furthermore, the broker's analysis suggests the balance sheet could theoretically handle four potential developments and the main constraint will be on human resources. This could mean that Wafi Golpu is delayed, as the broker believes Red Chris is firming up as a more attractive proposition.
Ord Minnett assumes a five-year development timeline for the block cave and also suspects Red Chris may leap over Wafi Golpu in the project pipeline as well as the longer-dated Cascabel project in Ecuador.
Ord Minnett highlights that both Red Chris and Havieron are brownfield projects and capital expenditure is manageable. Meanwhile, Havieron is looking more likely to UBS. Newcrest is yet to report a resource or reserve, or a mine plan a feasibility study for that matter.
Yet based on current reserves and mine plans Telfer is valued at around US$160m and UBS suspects the addition of 2mtpa of high-grade ore could sustain production at around 400,000 ounces per annum for over 10 years and cut costs to around US$900/oz (AISC).
The combined operation could then turn Telfer into a tier-2 asset. Newcrest defines such a gold asset as more than 200,000 ounces per annum with over 10 years of life at costs of less than US$900/oz.
Meanwhile, Macquarie believes the Fruta del Norte mine, for which the company has recently obtained finance (becoming a subordinated lender to the owner, Lundin Gold, and taking a 32% equity ownership) materially boosts the earnings outlook and should sustain production at over 2m ozpa for the next five years.
On the downside, Newcrest still has the weakest production and earnings growth within the large ASX listed peer group, the broker points out. It also lacks the debt to equity transfer of value expected from peers.
Ord Minnett , too, expects Newcrest will struggle to maintain a production rate of 1.5m ozpa, but calculates that when adding Fruta del Norte, Newcrest could initially maintain 1.8m ozpa before Wafi Golpu comes on board.
FNArena's database has two Buy ratings and five Hold for Newcrest Mining. The consensus target is $30.79, signalling -3.3% downside to the last share price.
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