Newcrest Mining Limited (ASX: NCM) is one of the largest gold mining companies in the world, and the largest in Australia, producing 2.2 million ounces of gold in FY2020. Together with their subsidiaries, they engage in the exploration, mine development, mine operation, and sale of gold and copper concentrates. Newcrest owns and operates a portfolio of predominantly low cost, long life mines and has a strong pipeline of Brownfields and Greenfields exploration projects. Their reserve and resource base is strong, with current gold reserves representing more than 24 years of production at current rates. Newcrest uses a variety of efficient mining methods for large ore bodies, together with selective underground mining methods to optimise high-grade epithermal deposits and porphyry deposits.
The company primarily owns and operates mines and projects located in Cadia and Telfer, Australia; and Lihir, Papua New Guinea. It also holds 70% interest in the Red Chris mine project located in British Columbia, Canada.
As of 31 December 2020, Group Ore Reserves are estimated to contain approximately 49 million ounces of gold, 6.8 million tonnes of copper, 35 million ounces of silver and 0.12 million tonnes of molybdenum. This represents a decrease of approximately 2.6 million ounces of gold (5%), 0.1 million tonnes of copper (2%) and 1.3 million ounces of silver (4%) compared with the estimate as of 31 December 2019. At the same period, the Group Measured and Indicated Mineral Resources are estimated to contain approximately 97 million ounces of gold, 17 million tonnes of copper, 87 million ounces of silver and 0.19 million tonnes of molybdenum.
Cadia is located 25km from Orange, NSW. Newcrest has 100% interest and mines for gold and copper deposits. Cadia is made up of the Cadia East underground panel cave mine and the Ridgeway underground mine. Cadia is the best and key asset for Newcrest – accounting for 38% of the total gold production of the company. In FY2020, Cadia produced 843k oz, with an AISC of US$160 an ounce.
The Cadia expansion project is being expanded as well. In the 1st stage, the capacity of the process plant can increase to 33mtpa. The second stage, which is in Feasibility Study, is focused on a further increase in processing capacity to 35mtpa and recovery rate improvement projects. The Cadia Molybdenum Plant Feasibility Study has an estimated capital cost of $95m, with commissioning of the plant expected in FY22.
Telfer is located 400km from Port Hedland, Western Australia. Newcrest owns 100% interest and mines for gold and copper deposits. Telfer comprises the Main Dome, West Dome open pits and underground mines and produces gold and copper via a large, dual train, comminution circuit followed by flotation and cyanide circuits, which produce gold and a copper-gold concentrate. The metrics from the production centre for FY2020 are:
- Production: 393koz of Gold
- 16kt of Copper
- Ore Reserve of 1.4moz gold and 0.18mt of copper
- Mineral Resource of 5.4moz gold and 0.54mt of copper
Located in Aniolam Island, 900km from Port Moresby, PNG, Lihir is owned 100% by Newcrest and mines for Gold deposits. Most of the ore that Lihir produces is refractory and treated using pressure oxidation before the gold is recovered by a conventional leach process. The metrics from the production centre for FY2020 are:
- Production: 776koz of Gold
- 23moz in Gold Ore Reserves
- 49moz in Gold Mineral Resource
Located 1700km from Vancouver, Canada, Red Chris is home to gold and copper deposits. Newcrest owns a 70% interest in the asset, while its joint venture partner Imperial Metals owns the remaining 30%. Post the acquisition in 2019, Red Chris is believed to have serious potential when it comes to expansion. In FY2020, Red Chris’s metrics were:
- Production of 39koz of Gold
- Production of 25kt of Copper
Currently, Newcrest is implementing a two stage transformation strategy to unlock the potential of Red Chris.
This is an advanced exploration project that is currently in the permitting phase in PNG. Newcrest along with Harmony Gold Mining Company own 50% each of the project. Deep drilling has identified a world class copper-gold porphyry deposit at Wafi-Golpu (the Golpu deposit) suited to bulk underground mining techniques, similar to Newcrest’s Cadia operations in Australia. Exploration activity to date has shown that the Wafi-Golpu tenements host one of the highest-grade porphyry copper systems in south-east Asia. As of FY2020, the metrics of the project were:
- 5.5moz Gold Ore Reserve
- 2.5mt Copper Ore Reserve
- 13moz Gold Mineral Resource
- 4.4mt Copper Mineral Resource
A joint venture with Greatland Gold and located 45km from Telfer, Newcrest can have a 70% interest and early works construction is underway at Haverion. Newcrest has a total expenditure of US$65 million and the completion of a series of exploration and development milestones across a four-stage farm-in, over a six year period that commenced in May 2019. Telfer is the largest processing facility in Paterson Province and has sufficient capacity and capability to process other discoveries in this region.
Newcrest is expected to release the results of its Pre-Feasibility Study for the Project by late calendar year 2021.
The story with most Aussie gold miners has been the same. Newcrest share price has taken a pounding as selling pressure intensified in a shift away from gold underpinned it. The rebalancing of several ETFs has also added selling pressure to gold miners in not just Australia, but globally. In the chart below, we can see the increase in trading volumes of Newcrest shares has always been high, but a lot redder spikes than green from 2021 onwards.
In the half year earnings report, Newcrest showed record free cash flow and increased its dividend. Strong operating performance and gold price underpins record free cash flow in December half:
- Statutory profit and Underlying profit of $553 million, up 134% and 98% respectively
- Earnings per share 121% higher than prior period
- All-In Sustaining Cost (AISC) margin of $842 per ounce, up 48%
- Record December half year free cash flow of $439 million
- Cadia renewable energy contract signed – on track for 30% reduction in emissions intensity by 2030
- New dividend policy targets 30-60% of annual free cash flow to be paid in dividends (was 10-30%)
- Interim dividend of US$ 15 cps, fully franked, 100% higher than the prior year
Underlying profit of $553 million was $273 million (or 98%) higher than the prior period primarily driven by higher realised gold and copper prices, higher copper production at Cadia, a positive fair value adjustment recognised on Newcrest’s investment in the Fruta del Norte finance facilities, and a full six months of improved Red Chris performance. These benefits were partially offset by increased income tax expense as a result of the Company’s improved profitability during the period, lower gold sales driven by lower production, the unfavourable impact on operating costs for the Australian operations from the strengthening of the Australian dollar against the US dollar.
Yes, gold is used as a hedge against inflation, but there is another macro-economic factor that affects gold prices even more so – Treasury yields. There is an inverse relationship between gold and interest rates. As bonds were sold off early into the year, the bond yields rose considerably and affected many sectors. Bond yields are essentially interest rates which determine how much interest you receive. Since gold does not give investors interest payments, the market usually jumps ship and sells gold for bonds. Gold prices have sunk 19% in the first quarter of 2021, but they have held up above the 20% mark – which signifies a technical bear market. Bets of a brighter economic outlook and fears over a spike in inflation and debt levels, prompted a bond sell-off and a dollar rally, raising the opportunity cost of holding bullion.
However, with further stimulus being introduced into the US economy and Feds across all developed markets looking to keep interest rates low in a bid to increase inflation and force economic recovery, the prospect for gold for the next 2-3 years is fairly positive. We may not see the highs of last year when the gold price was over $2000 an ounce, but the current price of $1700 should provide a floor in the medium-term. Higher rates make gold’s lack of yield more unappealing. Low rates make it look better. With the US and Australian Feds insisting that it will keep rates low and allow inflation to reach 2% and sustain it, gold stocks do look attractive at these low prices.
News in the past few days has suggested that China has given permission to domestic and international banks to import large amounts of gold into the country. As the world’s largest consumer of gold, the increases will have quite a say as far as gold prices go – leading to higher margins for the gold miners Down Under. Recovery of gold consumption and demand from India and China is vital for the gold price. This may turn out to be just the catalyst that the gold price needs in order to wake up from the US$1700s that it is trading at.
Cadia still has over 15 years of high production under its belt and totally about 37m ounces of gold left in reserves. While Lihir’s AISC has increased 36% in FY2020 to US$1206 an ounce, Newcrest has put plans in place to increase recoveries of copper and gold. Lihir also has more gold reserves left than Cadia – coming in at 49m ounces.
Progress at Lihir:
- Impact of argillic ores is lower than initial expectations
- Mine Optimisation Study identifies potential to unlock additional ~1.4Moz2of contained gold in FY 22-34 and enables deferral of Seepage Barrier capex by ~18 months
- Phase 14A opportunity brings potential for additional 400-600koz of contained gold in FY 23-25
- Aspiration of >1Moz p.a. for 10-12 years from FY23
Progress at Cadia:
- On track for commissioning in June quarter 2021
- Additional revenue stream for Cadia
- First production expected September Quarter 2021
- Estimated ~$50/oz reduction in Cadia’s AISC
- Capital cost of ~$95 million
Progress at Havieron:
- Initial Inferred Mineral Resource estimate of 3.4Moz of gold & 160kt of copper
- Mineralisation remains open, potential for resource growth over time
- Growth targets include SE Crescent & Breccia, NW Crescent & Northern & Eastern Breccia
- Additional ~65,000m of growth drilling expected by 30 June 2021
The production guidance numbers for FY21 assuming no COVID-19 related interruptions are above. However, the AISC expenditure guidance for FY21 includes an estimate of additional costs associated with managing the business in a COVID-19 context in the order of $30-40 million. This compares with the estimate of an additional ~$20 million of AISC spend to have been incurred on COVID-19 related matters in the current period.
Now, assuming an average AUD: USD 0.77 exchange rate for full year FY2021, copper spot prices of $3.5 per pound, the revenues and earnings estimates are as below. Close to 89% of Newcrest sales during the half-year were unhedged and hence, they were able to take advantage of the high gold prices. We expect this trend to continue. By keeping the average price of gold locked in at US$2000 an ounce for the same period (which is by no means a bullish assumption with the way inflation and interest rates are headed), we can extrapolate and arrive at below forecasts for revenues and EBITDA.
The estimates show that the EBITDA margins will expand further to over 52% in FY2022. However, with a much more stabilized economic policy in 2023, we expect gold prices to stabilize and profit margins to revert back to its mean.
Newcrest’s net debt on 31 December 2020 was $330 million. This comprises $2,013 million of capital market debt and lease liabilities of $61 million, less $1,744 million of cash holdings. On 31 December 2020, Newcrest had liquidity coverage of $3,744 million, comprising $1,744 million of cash and $2,000 million in committed undrawn bilateral bank debt facilities with maturity periods ranging from 2021 to 2023. Newcrest’s financial objectives are to meet all financial obligations, maintain a strong balance sheet to withstand cash flow volatility, be able to invest capital in value-creating opportunities, and to provide returns to shareholders. Newcrest looks to maintain a conservative level of balance sheet leverage.
The short-term liquidity position is extremely strong for Newcrest. They have US$1744 million in cash as of December 2020 and US$1574 in inventories. With a total assets exceeding total liabilities by 3x, they have a very healthy balance sheet.
The strong financial results for the half year show how much the increase in gold price has translated into improved profitability, record half year free cash flow and an increase in returns to shareholders in the form of a fully franked interim dividend of US$ 15 cents per share, 100% higher than last year. The Board has approved a new dividend policy that retains the minimum dividend of 15 cents per share per annum but more than doubles the target percentage of free cash flow to be paid in dividends to 30-60%. This change in policy allows shareholders to benefit from the stronger free cash flows that result from higher gold prices and is supported by Newcrest’s robust balance sheet with its minimal near-term debt obligations. While Newcrest is by no means a dividend stock, a sustainable increase in dividends underpinned by high gold prices for a couple of years is an added benefit to shareholders.
Coming to the valuation, we can see that Newcrest is modestly priced at this moment in time. A forward P/E of 15.7x and EV/EBITDA of 7.71x is fairly modest. Another factor the markets have yet to consider is the true extent of the upgrades from the expansion project. Perhaps the biggest metrics of all here is the PEG ratio – It measures the Price against the Earnings growth estimate of the company. A low ratio here is again good because it suggests that the company is undervalued relative to the growth forecast it has over the next few years.
Newcrest Mining is the biggest gold miner here in Australia. Their projects have a very long life at max capacity, and they have expansionary and advanced exploration projects in its pipeline. A very healthy balance sheet, favourable gold price forecasts, and a modestly priced valuation multiples mean that we recommend long-term investors to “Buy”.