Stock of the Week Newcrest Mining (NCM)


Stock of the Week – Newcrest Mining (NCM)

Newcrest Mining (NCM) is Australia’s largest gold producer, a blue chip stock with mining and exploration projects in Australia, Papua New Guinea (PNG), Indonesia and the US. The miner also has a smaller exposure to copper, mostly as a by-product of its gold production.

Currently, we have a hold stock analysis recommendation on NCM given its leveraged exposure to gold and the uncertainty regarding the Australian Resource Super Profits Tax.

Importantly, NCM is working on bringing a few massive projects on stream. It already has six operating mines and five significant development projects.

NCM achieved its first gold production at its Hidden Valley gold mine in PNG, and delivered initial production ore at Ridgeway Deeps, a resource below its Ridgeway mine in central New South Wales.

In contrast to most miners, NCM mostly focuses on exploration-led production increases rather than acquisitions.

However, NCM has reversed this trend with the latest news of a takeover of Lihir Gold (LGL). The market is excited about the merger, which will boost NCM’s long-term value at a time when gold is looking at record highs and a strong future.

High Time for Gold

While base metals suffered over the global economic downturn, one metal to emerge from the metals slump looking strong has been gold, which demonstrated amazing strength in 2009-10.

The precious metal remains in high demand due to a volatile US dollar and economic uncertainty.

Such uncertainty includes fears of euro-region economic troubles, which has dominated global economic sentiment of late.

These fears have driven investors to gold as a safety investment. With the precious metal still safely above US$1,200 per ounce, it seems likely that investors will continue to turn to gold as a refuge from Euro-region risk.

Last night’s international session confirmed that gold is looking robust, with the precious metal hitting a record high of US$1,252.80 per ounce during the session.

Most forecasts are pointing towards further gains in the gold price, which is a positive for NCM going ahead.

Takeover Triumph

On 1 April, it was no fool’s joke when LGL rejected a $9.2 billion takeover offer from Newcrest Mining (NCM).

The offer, which valued LGL at $3.87 per share, was rejected by LGL management because it did not include a sufficient control premium.

Despite the bid representing an almost 30% premium its previous closing price, LGL’s chairman argued it did not fully capture the significant growth potential of the company’s three mines.

NCM argued differently, stating that its offer was “full and fair”.  According to NCM management, the deal would deliver $85 million in annual synergies.

However, LGL was to reconsider the offer when, on 20 April, NCM sent a letter to LGL’s chairman, Ross Garnaut, offering to improve the terms the takeover offer.

After canvassing the views of LGL’s shareholders, NCM offered to improve the scrip component of the offer but not the offer price.

On 4 May, LGL accepted Newcrest’s sweetened takeover bid. The revised offer values LGL at $9.5 billion, representing a 6.4% improvement over NCM’s previous bid.

The LGL/NCM tie-up could be a harbinger of further consolidation in the industry, with soaring gold prices putting added pressure on miners to replace existing reserves.

Yesterday, NCM completed the due diligence of LGL and stated that it is satisfied with the outcome of the process.

The two companies have advised that the proposed merger’s timetable has been extended by 1-2 weeks, with its scheduled completion now expected in September.

First Ever Dividend

On 12 February, NCM reported its 1H10 results. Profit for the half gained 14.4% on last year to $176.2 million, whilst underlying profit strengthened 10.3% to $266.6 million.

The underlying profit result was a touch below analysts’ expectations of $270-$281 million.

The market however was impressed by NCM’s decision to pay its first ever half dividend – of 5 cents per share.

Sales revenue for the half fell 8.2% to $1.19 billion whilst capital expenditure sat at $440 million.

Exploration spending for the half was at $51 million and NCM’s gearing remained negligible (up to 3% from 2% a year earlier).

NCM noted a number of growth projects are nearing completion with board approval of the Cadia East project a bonus.

The company also provided an updated resource for its O’Callaghans deposit in Western Australia, where the indicated and inferred tungsten resource has risen 53% to 260,000 metric tonnes while copper has climbed 37.5% to 220,000 tonnes.

Looking Ahead

Going ahead, NCM will work on its Cadia East gold and copper deposit in NSW, which had development approved in April. The site is one of the world’s largest gold deposits, and it will enable NCM to ramp up production in the Cadia Valley to 700-800 koz of gold per year for the next 10 years.

NCM is in a fairly strong place at the moment. The market has welcomed a merger between NCM and Lihir Gold, as the result will be a competitive powerhouse focused on a lucrative commodity: gold.

NCM’s 2007 move to close out its hedge book has proven successful as gold prices have continued to hit record highs this year.

Going ahead, NCM is upbeat on its future, considering the outlook for gold. The only major dark cloud hanging around at present is the impact of the government’s proposed resource tax on the company, which NCM estimates would have a negative impact on net present value of 3%-8%.

NCM recently reported its 1Q10 production numbers. Gold and copper production declined on year, which NCM attributed the drop in production to extended commissioning and slower ramp-up at its Hidden Valley project.

As a result, FY10 gold production guidance is now expected to be at the lower end of 1.81 – 1.91Moz.

Helping to offset the disappointing production numbers, cash costs were largely in line with the previous quarter and are expected to be at the lower end of the guidance range in FY10.

Together, the two will command one of the highest gold production rates in the world and have three cornerstone assets (Cadia, Telfer and Lihir).

Should gold prices continue to accelerate, this merger could be a match made in heaven.

NCM Australian share price has been performing well as of late, gaining 10% since late May 2010 and last closing at $33.86.