COMPANY NEWS & UPDATES
Newcrest Mining Limited ( NCM )
Hold Valuation $ 29.50
Earnings Forecast
Yr to June |
2020A |
2021F |
2022F |
|
Sales Revenue
($ M )
|
5,922.6 6,168.7 |
5,336.4 |
|
Reported
Profit ($ M )
|
1,136.3 1,520.1 |
1,074.9 |
EPS ( c ) |
146.0 |
186.8 |
132.1 |
Div ( c ) |
36.5 |
75.0 |
53.0 |
P / E ( x ) |
21.2 |
14.8 |
21.0 |
Yield (%) |
1.2 |
2.7 |
1.9 |
Franking (%) |
100.0 |
100.0 |
100.0 |
|
EPS Growth
(%)
|
43.5 |
27.9 |
-29.3 |
* Profit & EPS adjusted for options , goodwill , notional earnings and nonrecurring items .
Short-term Headwinds , But Long-term Production Potential
Newcrest ' s first-half FY21 result was strong , with net profit more than doubling to USD 553 million compared with the first half last year .
Improvement mainly reflected a 26 % uplift in the gold price and a 17 % rise in the copper price to USD 1,826 per ounce and USD 3.15 per pound , respectively . Production was flat overall , which is reasonable given that Gosowong no longer contributes . The 11 % rise in the all-in sustaining costs in the half to USD 974 per ounce was somewhat disappointing , reflecting the Australian dollar appreciation and COVID-19 associated costs . First-half net profit was a bit lower than expected , and we lower our full-year forecast to $ 1.4 billion , or $ 1.66 per share , from $ 1.5 billion . However , the lower profit expected near term is not sufficiently material to warrant a change to our valuation .
Newcrest shares are modestly undervalued , in our view . We think this reflects market concerns regarding production challenges at Lihir and imminent grade decline at Cadia . The company also has several development projects in Havieron , Red Chris , and Wafi-Golpu where material capital expenditure is just starting . Additional production is likely three to six years away , but the capital expenditure outflows are imminent , generally a situation the market doesn ' t like . We are positive on all three developments , adding volumes and lowering unit costs , but the longer-term time frame for the earnings benefit means they ' re likely not fully factored into the share price .
We expect medium-term earnings to decline to around $ 1.00 per share as commodity prices decline and output from Cadia falls with planned lower grades . However , we expect earnings to subsequently improve to above $ 1.40 per share , close to current levels , from 2025 . We expect the likely start of processing highergrade ore from Havieron at Telfer and better ore at Lihir to drive the rebound .
Newcrest has revised its mine plan at Lihir and now sees potential to mine an additional 1.4 million ounces of gold across about 12 years from FY22 . The company is also exploring the potential for a further approximate 0.5 million ounces from FY23 to FY25 . The latter option would see the open-pit wall strengthened with concrete and steel to steepen it and access higher-grade ore not currently in the reserve .
The proposed improvements come after a challenging year or so at Lihir , where more difficult to process ores have slowed throughput and damped recoveries . We had confidence that Newcrest could work through the issues and deliver improvement to get production back above 1 million ounces from about 800,000 ounces a year currently . We ' re encouraged that management now has a concrete plan to lift the average grade processed and improve recoveries . However , we had already largely anticipated the scope for improvement in our forecasts , given management ' s strong operational record and the scale of potential improvement options that come with the massive Lihir ore body . Long life enhances the potential for operational gains , and we believed it would be overly punitive to extrapolate the recent processing challenges .
A meaningful portion of Newcrest ' s future value hinges on exploration and development success , and we remain optimistic on the mediumterm pipeline . The additional USD 112 million of funding for the Havieron exploration decline is a welcome step and sees the mine on track to start commercial production within the next three years . Drilling at Red Chris in Canada has so far highlighted the potential for mining of higher-grade ore prior to the start of a bulk underground mine in the second half of the decade . Further activity will be undertaken in 2021 to flesh out the potential to mine highgrade pods to bring forward the improvement in cash flows . Red Chris in its current state is a subscale , low-grade , relatively high-cost mine . But our enthusiasm is about the
Page 12 of 21