Newcrest Mining (NCM) is Australia’s largest gold producer and one of the world’s top five gold mining companies by production, reserves, and market cap. NCM’s main operations are in Australia, Indonesia, Papua New Guinea, Fiji and West Africa, and has a global workforce exceeding 19,000.

The company has a portfolio of predominantly low-cost, long-life operating mines, although it also has a history of operations troubles at its key projects (both operational and developmental).

1H13 Results

NCM’s 1H13 results were disappointing on several fronts. Gold production for the half was 953,000 ounces, down 18% on prior corresponding half.

Cash costs increased 8% on same period in FY12. The poor production results led to revenue falling 28% and underlying profit plummeted 48%.

Guidance downgrade

Late last month, the group downgraded its full year production – its fifth downgrade in the last two years. Gold production was lowered from 2.3 to 2.5 million ounces of gold to 2.0 to 2.15 million ounces.

The company cited operational issues at Lihir and Gosowong as the reason for the downgrade. While the downgrade was not a massive shock given the poor 1H results, it is yet more evidence of management inability to forecasts its own production.

Gold Prices

While the groups poor results have contributed to recent share price weakness, it correlation to the gold price has also contributed.

The above shows the gold price (white line) and NCM share price (yellow line) over the last nine month.

As is shown, the fall in the gold price has dragged on NCM’s share price. With fears of monetary easing-induced hyperinflation are abating, other asset classes such as equities are offering relatively stronger returns.

Outlook

NCM’s 1H13 results showed the effects of both poor production and a falling gold price.

Disappointingly, the group last month downgraded its full year guidance. This downgrade was already from what we would consider low-end guidance and while not a complete surprise it does not leave us with much faith its management’s ability to forecast its own production.

With the flight to stronger returning asset classes likely to continue in the near-term, we see continued weakness for the gold price and as a by-product NCM’s share price.

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Kingsgate Consolidated (KCN) is a gold miner, operating in South East Asia, South America and Australia. The company’s major operation is the Chatree Mine in Thailand, and it also has the smaller Challenger Mine in South Australia.

Rising cash costs squeezing margins

In late January, KCN revealed a 13.4% slide in 2Q13 gold output relative to the same period a year earlier. Compared to 1Q13, gold output rose slightly by 4%.

Production was affected by the temporary closure of the Chatree North Expansion Plant (Plant 2) and interruptions at Challenger following the establishment of two new mining fronts.

The biggest disappointment with the result was another rise in the group’s cash costs. Cash costs rose 37% from 1Q13 to US$975/oz. However, compared to 2Q12 costs surged 60%.

KCN attributed the cost squeeze to lower ore grades at Chatree and ore sourced from an area of Chatree’s Pit A that was known to have lower recoveries.

The poor 2Q13 production result contributed to a 76% slide in 1H13 net profit to $8.1 million. Revenue was up 10% on-year, however the growth was driven primarily from stronger gold sales. Weaker output from Challenger and a lower realised average gold selling price detracted from the growth in revenue.

Gold prices trending down

The price of gold has weakened noticeably in recent months. Spot gold is trading around 7% below KCN’s 1H13 average realised selling price of US$1676.

The outlook for the precious metal has declined amid signs of weakening physical demand and diminished prospects for further monetary easing. In an example of waning demand, the US Mint sold 62,000 ounces of American Eagle gold coins last month.

This was much lower than the sale of 80,500 ounces in February and 150,000 ounces in January. Holdings in gold-backed exchange-traded funds are also 6.9% weaker in the year-to-date.

Furthermore, with the world economy stabilising, central banks like the US Federal Reserve are less inclined to implement additional monetary easing measures.

In our view these are among the key factors that will handicap gold prices, and by extension, KCN’s revenue growth.

Outlook

KCN stuck to its FY13 gold production guidance of between 200,000 and 220,000 ounces. 1H13 production totalled 90,413 ounces, meaning KCN is relying on stronger 2H13 output numbers in order to meet its guidance. Although Chatree’s Plant 2 is now back online, development at Challenger is expected to continue.

Also, the limited availability of stoping areas at Challenger the company highlighted in its 2Q13 production report indicates difficulties accessing the ore body being mined. Therefore we don’t share KCN’s optimism that full year production guidance will be met.

Moreover, the upward trend in its cash costs is coming at a time when gold prices have been retreating. This is creating pressure on cash margins and will ultimately translate into poor earnings in our view.

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Forge Group Limited (FGE) identified as a share to buy is a multidisciplinary Engineering, Procurement, and Construction (EPC) service provider. The group, with over 1,700 employees delivers end-to-end EPC turnkey solutions to the power and infrastructure, minerals and resources, and oil and gas sectors in Australasia and Africa.

FGE services some of Australia’s and the world’s most reputable mining and energy companies such as BHP Billiton, Rio Tinto, Fortescue Metals Group, Woodside, Chevron, MCC and AngloGold Ashanti.

The group has four divisions, branded as follows:

 
1H13 Results

FGE’s results for the first half of the financial year were impressive. Revenue was $502.9 million for 1H13, up a staggering 123% when compared to the prior corresponding period.

Net profit for the half was $49 million, a massive 60% increase on the 1H12. Much of the above was helped by the acquisition of Forge Group Power (formerly CTEC), which it acquired in early 2012 for $38.6 million.

FGE balance sheet is also in a very healthy position, with a net cash position of $161.9 million at the 31 December 2012, up from $81.8 million at the same time in 2011.

Cash flow from operations was very solid, almost tripling to $79 million from $28 in 1H12. The group also increased its interim dividend by 60% to 10 cents a share.

Growth driven by Power

The above shows steady revenue growth up until the 2H12, after that revenue exploded due to the acquisition of Forge Group Power (formerly CTEC). As of 23 January 2013, the group had an order book of $1.04 billion, $462 million of which was secured in the December half.

The order book includes such projects as: power stations for mining giants Rio Tinto and BHP; an ore processing facility for Fortescue Metals; and Navy Fleet Maintenance for the Australian Navy.

Outlook

FGE’s 1H13 results were spectacular and its outlook appears to be promising, with a range of projects on the go. The company’s should be able to continue leverage its current relationships with mining majors BHP, Rio Tinto and Fortescue into new contracts in the future.

Interestingly 82% of the new contacts secured in the 1H13 were for the power division, which we see as a good move. While many other mining service contractors are fighting over the more common capital expenditure projects, FGE has recently been positioning itself in the less competitive power solution business.

We believe that groups position as a power provided coupled with its strong balance sheet will continue to see the company growth its earnings and as a by-product its share price.

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Perseus Mining (PRU) is a gold explorer and producer, focused on under-explored gold belts in West Africa. The group’s main assets are located in Ghana and the Ivory Coast, consisting of the Edikan Gold Mine (EGM), the Tengrela Gold project (TGP) and the Grumesa Gold Project (GGP).

The Edikan Gold Mine in Ghana has 5.6Moz of Measured and Indicated gold resources, including reserves of 3.4 million ounces of gold, and 1.7Moz Inferred gold resources. Production began at the mine in the 3rd Quarter of 2011.

The Sissingue Gold Project which is part of the Tengrela Gold Project. It is the group’s most advance non-producing project.

Quarterly Production

As mentioned, EGM has been producing gold since the third quarter of 2011.  Since the initial ramp of production PRU has reported four quarters worth of production numbers.

The first two quarters were within guidance, however the last two set of figures released have missed. The December 2012 quarterly production result was the more disappointing of the two misses.

Gold production over the quarter was 51,090 ounces, 13% below the lowered guidance provided in November and also below the previous quarter’s production of 52,610 ounces.

Cash costs for the December quarter was $588 per ounce, 2.3% higher than the revised guidance and much higher than the $475 per ounce in the September quarter. The group blamed the production short-fall principally on lower crusher output since its initial downgrade on 23 November 2012.

The Sissingue Gold Project

The Sissingue Gold Project located in the Ivory Coast is the project PRU is planning on getting to production. The group is targeting a mid-2014 commissioning date, but given its 12-month build time from the start of construction we see this timeframe as unrealistic.  PRU still needs to:

 
Finally PRU will need to approve development of the project, which it has put on hold pending clarity of the some of the aforementioned tasks.

Outlook

PRU has missed two quarterly production results in a row. The production issue of late is relating to a mechanical issue to do with the drive shaft for the crusher, which has results in poor mill utilisation.

The drive shaft is scheduled to be replaced in February, but given the downtime that will be required for the replacing and testing of the new shaft we can’t see the group meeting its previous guidance range of between 127,000 to 143,000 ounces.

PRU offers long-term value at these levels, but until the company can stick to its guidance we have too many short-term concerns.

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Mount Gibson Iron (MGX) is Western Australia’s fifth-largest iron ore miner based on export volume. The company was one of the first new iron ore producers in the mid-west region of Western Australia and it took advantage of that position.

MGX experienced a considerable boost in 2006, when it acquired Aztec Resources and its Koolan Island project. However, the group’s FY12 result showed contraction in profit in over five years.

FY12 Results

MGX’s FY12 performance was a real change from its previous years of growth.

Tonnes of ore sold for FY12 was 5.21 million, which down a 0.5% on FY11.  Whilst this may not look like that bad of a result, it came on the back of a 29% increase in production, which is an indication of a lower grade of ore.

Sales revenue over the 12 months decreased 3.5% to 648.5 million, with the company blaming a lower price for its ore. Net profit was down a massive 28%, to 172.5 million.

The group did have $292.7 million of cash on hand, but this was down from $387 million a year earlier. Operating cash flow fell 75.6% to $56.2 million over the financial year, and if we see a repeat decline in FY13, MGX’s cash balance is likely to experience another steep drop.

Iron ore

Iron ore prices had a dramatic fall since the end of the financial year, dropping from a little under $135 a ton to a low of around $86 a ton early September. This represented a massive 36.3% decline.

Since then the iron ore price has risen over 32% on the back of an increase demand by China. China, which accounts for over the 60% of global demand for the ore, saw its exports grow at the fastest rate in over three months in September.

Exports grew by 9.9% compared to a year earlier, which was well above the 5.5% forecasted by economists. What we think is alarming for MGX is that over the period of this increased demand MGX’s share price has been more or less flat.

This compares to other pure-play iron produces like Fortescue Metals and Atlas Iron which have seen their share price increase by over of 30%.

Outlook

MGX’s FY12 results were disappointing to say the least, and unless there is a material pick up in iron ore prices we don’t see a return to growth in the near term. Whilst the iron ore price has recovered 32% since its September low it is still down over 15% since the end of FY12.

What is worrying is that despite the recent rise in the ore price, MGX’s share price was not able to hold on to any of its gains like its peers did. This indicates that the selling pressure relates to deteriorating company fundamentals such as the lower grades it mined in FY12.

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Regis Resources (RRL) is an Australian gold production and exploration company. Its management team has a successful track record of developing mid-sized gold operations within Australia and Africa.

RRL’s flagship asset is the Duketon Gold Project in Kalgoorlie, in WA. The project comprises of 387 leases that cover over 2,030 sqkm of ground. These leases contain three main deposits in Moolart Well, Garden Well and Erliston.

FY12 results

RRL’s only producing mine is the Moolart Well. The group reported June quarterly gold production of 26,228 ounces, at a cash cost of $532 (pre-royalties).

Although cash costs rose slightly from the March quarter’s $519, RRL’s costs were still lower than its major peers due to the higher reserve grade mined and the low-cost nature of its operations.

RRL had guided for FY12 production to be between 95,000 ounces – 105,000 ounces, but beat its own guidance with 105,413 ounces produced. The company reported an FY12 net profit of $74.7 million, which was almost double FY11’s result and came on the back of a 58% jump in gold sales.

Projects with significant potential

The Moolart Well mine is projected to consistently produce around 100,000 ounces of gold a year for at least the next 4 years.

The company began producing from Garden Well earlier this month, and has forecast output from this mine to be between 220,000 240,000 ounces in 2013, at a cash cost of $400 – $450 an ounce.

RRL expects to commence development of the Rosemont Gold Deposit in the coming quarter. Taking into account Garden Well’s output and the development of Rosemont, RRL expects to produce over 400,000 ounces of per annum, significantly higher than FY12’s number.

Outlook

With FY12 now over, FY13 and FY14 earnings expectations will become more prominent in valuation models.

RRL is planning a dramatic increase in production over the coming years, which is likely to translate into a massive increase in earnings and cash flow from FY13.

With Garden Well and Rosemont about to ramp up output, the catalysts are in place for RRL to re-rate to a higher price earnings multiple, which is expected to translate into further share price gains.

PanAust (PNA) is a mid tier miner that holds mineral assets in Laos and Thailand.

In Laos, PanAust operates the large Phu Kham copper-gold operation, which commenced production of copper-gold concentrate in April 2008. The Ban Houayxai Gold-Silver mine which is also located in Laos commenced commercial production in June 2012.

First half results

PNA reported a first-half net profit of $65.7 million, which was a 5.4% fall on the prior corresponding period. The fall came despite a 1.5% rise in revenue to $306.2 million, with a sharp fall in copper and gold prices to blame for the differential.

On the positive side PNA announced a maiden interim dividend of 3 cents a share, as it wraps up a two-year, US$450 million capital expenditure program.

The company reiterated its full-year production guidance of around 64,000 tons of copper, 135,000 troy ounces of gold and 650,000 ounces of silver.

Growth

As mentioned the group has spent US$450 million on capital expenditure which should hopefully result in further production growth.

PNA recently upgraded certain facilities at its Phu Kham mine and as a result, copper production is expected to rise to between 65,000 tons and 70,000 tons in 2013.

Gold production is also expected to increase by 7,500 ounces. The Ban Houayxai Gold-Silver commenced commercial production in June 2012. The second half is expected to deliver over 65,000oz of gold at a cash cost of approximately US$500/oz after silver credits.

Gold and Copper markets

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The above two charts show the spot price of gold and copper since the start of July.

Both commodities have moved strongly higher, both boosted by the US announcing further quantitative easing.

China manufacturing data continues to be weak. This was today characterised by the reading of the HSBC’s Flash September Purchasing Managers Index, which was 47.8.

A reading below 50 indicates contraction.

As such we believe that these continued weak numbers will force the Chinese government into action and provide further stimulus, which in turn will see commodity prices continue to strengthen.

Outlook

PNA produced solid 1H results despite the fall in profit which was due to falling commodity prices.

The company is moving into an interesting phase with much of the previous year’s capital expenditure beginning to pay dividends in the production sense.

We also think that the positive momentum surrounding gold will continue over the next few months, providing further support for PNA shares.

Fortescue Metals Group Ltd. explores for and produces iron ore. The company conducts business worldwide and is listed on the Australian Stock Exchange.

Fortescue Metals announced the sale of the power station at its Solomon iron ore mine in the Pilbara region of Western Australia to TransAlta Corporation for net proceeds of US$300 million.

The company has concurrently entered into a long term Power Purchase Agreement with TransAlta for 100% of the power station’s capacity over the current life of the Solomon mine.

Fortescue CEO Nev Power said the agreement provides for long-term security of power supply to the 60 million tonne per annum Solomon mine, which is currently under construction.

Mining Shares News: BlueScope Steel (BSL) announced a 1H FY12 loss of $530 million

BlueScope Steel Ltd (BSL) is a major steel company in Australia and New Zealand, supplying flat steel products to the building, construction, manufacturing, automotive and packaging industries.

BlueScope Steel announced a 1H FY12 loss of $530 million, widening sharply from the $55 million loss from same period a year earlier. The result was worse than analysts expected.

The company said that a majority of its loss was made of two main costs; the restructuring of the business cost $260 million, while there was an impairment charge of $184 million on its Australian assets.

BlueScope said that trading conditions were improving, with the U.S. economy showing signs of recovery, but that its performance was not translating due to the high Australian dollar

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Atlas Iron (ASX:AGO) is an emerging iron ore producer and explorer.

With a growing number of high quality iron ore projects and one of the largest landholdings in the lucrative Pilbara region, AGO is now one of the area’s largest iron ore producers.

The company has a significant number of direct shipping ore (DSO) projects in WA. DSO projects are those that are in close proximity to ports, which helps to significantly lower capital costs.

One of the more recent ones, the Mount Dove DSO Project, is expected to contribute to AGO’s shipping tonnes later this calendar year.

Iron ore in spotlight

Iron ore miners have been in focus over the past few weeks due to a combination of factors. Among these is the improving prospect for iron ore.

We don’t believe the current spot price around $142 a tonne reflects what is still a favourable supply/demand dynamic for Aussie miners.

The European debt crisis forced some of the higher cost iron ore miners to cut back production last year.

This is likely to ensure the iron market remains in a supply deficit for a few more years yet, which not only supports prices but provides an opportunity for low-cost producers like AGO to fill the breach.

Also, the Glencore/Xstrata merger proposal has thrown the spotlight on pure play iron ore miners. Given the commodities giants’ lack of iron ore assets, the merger may encourage existing iron ore companies to either consolidate or potentially be the subject to an offer.

Output hit by cyclone

For the December quarter, Atlas Iron reported an 11% quarter-on-quarter fall in iron ore mined.  This was due to Tropical Cyclone Heidi, which impacted mining operations and damaged the Utah Point ship loading facility at Port Hedland.

As a result, AGO downgraded its FY12 production target to 5.5 – 5.7 million tonnes, from the previous 6 million tonnes.  However cash costs were within AGO’s targeted $42/ton-$45/ton range for FY12.

AGO, like other iron ore miners, suffered from a fall in iron ore prices during the quarter. However it also positioned itself to take advantage of a recovery in prices.

The company moved from quarterly pricing of its contracts towards shorter term reference points. This means it is more directly exposed to spot prices, which have trended higher in recent months.

Outlook

Despite last quarter’s operational issues, AGO managed to grow its cash pile from $373 million to $380 million.

With strong operating cash flows and competitive cost of production, AGO has significant capacity to fund development projects such as the Mt. Dove mine.

Although AGO faced a number of headwinds in the December quarter, we think it is well placed to take advantage of a recovery in iron ore prices. Atlas Iron (AGO) is an emerging iron ore producer and explorer.

With a growing number of high quality iron ore projects and one of the largest landholdings in the lucrative Pilbara region, AGO is now one of the area’s largest iron ore producers.

The company has a significant number of direct shipping ore (DSO) projects in WA. DSO projects are those that are in close proximity to ports, which helps to significantly lower capital costs.

One of the more recent ones, the Mount Dove DSO Project, is expected to contribute to AGO’s shipping tonnes later this calendar year.

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