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Alberto Abaterusso
Alberto Abaterusso
Articles (2546) 

Newcrest Mining Poised to Benefit From Next Gold Bull Market

The miner is set to deliver higher free cash flow and AISC margin

January 30, 2020 | About:

Despite a small dip recorded over the last two days when gold lost 0.4%, the price per ounce ($1,573.45 at close on Wednesday) is still up nearly 21% year over year and about 3% so far this year.

Monetary policy

Monetary policies adopted by authorities worldwide to stimulate the economy and prolong the expansion phase as much as possible have been the main catalysts pushing up the price of the commodity. Gold prices will continue to rise as central banks keep interest rates low, which favors investments in precious metals rather  than bonds and other fixed-income securities.

As expected, the U.S. Federal Reserve left the federal funds rate unaltered at 1.5-1.75% at the end of the meeting on Jan. 29, 2020. As Jerome Powell stressed, this decision is suitable for the current phase of the economic cycle and essential for keeping the inflation rate target of 2% or below.

Further, in line with last December's Federal Open Market Committee projections, yesterday’s decision suggests that the U.S. central bank should keep interest rates unchanged throughout 2020.

The European Central Bank will do the same to help the struggling eurozone economy. Last Friday, the European Central Bank reaffirmed the prime rate at 0%, the marginal lending facility rate at 0.25% and the deposit rate at -0.50%.

Gold on the rise

Favorable conditions for gold prices will also move up share prices of the precious metal's publicly traded producers.

Over the past 12 months, when the U.S. market hit record highs, holders of the VanEck Vectors Gold Miners exchange-traded funds (GDX) benefitted a lot from the rally in the gold price as they were rewarded with an impressive 30.2% return, topping the S&P 500 index by 8%. The VanEck Vectors Gold Miners ETF is the benchmark for the gold mining industry.

Investors can take advantage of the next gold bull market by investing in Newcrest Mining Ltd. (NCMGY)(NCMGF), an Australian explorer and developer of mineral properties and miner and seller of gold bars and concentrates of gold and copper.

This miner has assets in Australia, Papua New Guinea, Indonesia and Canada. Its highly profitable operations have shown increasing AISC margin (realized gold price per ounce minus all-in sustaining cost (AISC) per ounce) even when the output declines.

Newcrest recently issued the operating report for its second quarter of fiscal 2020, which ended on Dec. 30, 2019, showing a robust 16% year over year growth in the margin to $597 per ounce. This was a result of an 18% rise in the realized gold price to $1,456 per ounce despite a 16% fall in gold output to 551,115 ounces. The production of the yellow metal was affected by poor performance of operations in Papua New Guinea and Indonesia. The recent bushfires, which caused major damage in southeastern Australia, didn’t have any impact on the mines.

The solid performance of Australian copper mining activities, plus the addition of the Red Chris gold and copper open-pit mine in British Columbia, also helped the company to accomplish improved AISC margin. Newcrest Mining reported a 40.4% year over year increase in the production of copper to 37,695 tons, but a decrease of 4.3% in the realized price of the red metal to $5,908 per ton. Red Chris was purchased during the first half of fiscal 2020.

The gold business is predominant at Newcrest Mining as it makes up 80% of total sales, while copper adds the remaining 20%. The miner sold 560,570 ounces of gold in the second quarter of fiscal 2020 (down 11.8% from the prior-year quarter) and 36,394 tons of copper (up almost 28% from the prior-year quarter).

The miner expects to mine more gold in the second part of fiscal 2020 compared to the first part as activities will not be suspended as many times as the first and second quarters, when a higher number of sites were scheduled for regular maintenance.

Higher gold prices and production will impact the free cash flow, which is also expected to be higher in the second part of fiscal 2020. The acquisition of Red Chris and the Dec. 6, 2019 purchase of an additional 4.9% interest stake in Lundin Gold Inc (FTMNF) will also help hit the free cash flow target. Lundin Gold will start the commercial production of gold from the Fruta del Norte gold project in southeast Ecuador in the second quarter of calendar 2020.

Fruta del Norte is a first-class asset from which the most recent technical report forecasts that the miner can mine 325,000 ounces of gold every year at an AISC of $621 per ounce from total probable reserves of 5.02 million ounces, grading 8.74 grams of gold per ton of mineral.

Newcrest Mining targets to produce 2.375 to 2.535 million ounces of gold and 130,000 to 145,000 tons of copper in full fiscal 2020, which will end on June 30, 2020. The AISC is expected to range between $1,835 and $1,965 per ounce and total capital expenditures are anticipated at $740-$865 million, of which about 15% will be allocated to exploration activities.

The stock doesn’t seem expensive at the moment, as its share price of about $21.50 at close on Wednesday is below the 200- and 100-day simple moving average lines. It is still above the 50-day SMA line, but not by much.

The market cap is approximately $16.45 billion, and the 52-week range is $16.42 to $26.45.

The price-book ratio is 2.2 compared to the industry median of 1.54 and the enterprise value-EBITDA ratio is 10.2 compared to the industry median of 9.05.

The 14-day relative strength indicator of 52 tells that the stock is neither overbought nor oversold.

Disclosure: I have no positions in any securities mentioned.

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About the author:

Alberto Abaterusso
I am a contributor at GuruFocus. I primarily write about how to pick potential value stocks. Gold, silver and precious metals mining industries is also my cup of tea. My articles have also been widely linked by popular sites, including MarketWatch, Financial Times, 24hGold, Investopedia, Financial.org, CNBS, MSN Money, Zachs, Reuters and others. I hold a Master\\\'s Degree in Business Administration from Università degli Studi di Bari (Italy), Aldo Moro. I am based in The Netherlands.

You can follow me on Twitter at https://twitter.com/AAbaterusso

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