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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Sims Metal Management (SGM) collects, sorts and processes scrap metal materials that are recycled for resale.

The company’s divisions include ferrous recycling, non-ferrous recycling, secondary processing of non-ferrous metals and plastics, international trading of metal commodities and the merchandising of semi-fabricated steel products.

SGM has operations in Australia, New Zealand, the United Kingdom, North America, Asia and Europe and is the world’s largest listed metal recycler with approximately 270 facilities and 6,600 employees globally.

The company is currently in a global search for a new CEO after current CEO Daniel Dienst announced he would retire when his contract concludes on June 30 2013.

1H13 Results

The group’s 1H13 results were disappointing to say the least. Revenue came in at $3.4 billion, a 25% decline on the prior corresponding half, due to a reduction of intake shipments in North America.

SGM reported a 1H13 net loss of $295.5 million, 53.3% better than the prior corresponding period’s $633.2 million loss. The result was attributed to goodwill impairments and inventory writedowns totalling $291.3 million.

On an underlying basis, the group did record a $10 million profit, although the rest was down from $42 million a year earlier. Given the poor result, management decided not to declare a dividend for the first half – the first time the company has not paid an interim dividend since listing.

US and UK Businesses

On 21 January 2013, SGM announced that it will form a special committee to investigate the inventory valuation issues in the company’s UK business.

The result of the committee’s investigation was a $78 million write-down of inventory, of which $16 million was allocated to 1H13 and the remaining balance resulted to a restatement of prior period results.

The write-down represents a massive 29% of the value of inventories in its UK business. That trouble does not stop in the UK.

SGM’s US division, which contributes around 60% f the group’s overall sales, also suffered impairment charges in the first half. The company recorded a goodwill impairment charge of $291 million in the 1H13.

Excluding the write-downs, the US business barely made a profit, reporting an underling EBIT of $2.1 million–a 30% drop from the prior corresponding period.

Looking ahead

The outlook does not look pretty for SGM, at least in the short-term. The $78 million writedown on its UK inventory is extremely alarming because it shows the company’s lack of adequate financial controls in relation to its inventory reporting.

It also brings into question the company’s financial controls in other regions and raises the possibility of further write-downs. Poor management has led to the decision not to distribute a dividend for the first time since it listed, which does not bode well for shareholder confidence.

Moreover, the group downgraded its guidance three times in 2012. Without a significant pickup in US economic activity, we cannot see this year being any different. As such, we feel there is more downside to SGM’s share price in the near-term.

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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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Tabcorp Holdings Limited (TAH) is a gambling and entertainment group involved in a combination of wagering and media activities across Australia.

The company is divided into four main segments: Wagering, which includes totalisator and fixed odds betting; Media & International, including Sky Racing and Sky Sports Radio; Gaming, which includes a variety of Tabaret venues across Victoria; and Keno, which mostly operates in NSW and QLD clubs and hotels.

Back in June 2011, TAH successfully completed the demerger of its Casino business into the Echo Entertainment Group.

Promotional spend hurts margins

TAH’s FY12 core net profit rose 12.7% to $340 million. Revenue was up 3.1% as growth in Fixed Odds offset declines in totaliser revenues. Wagering costs climbed as TAH invested in technology and expanded its promotion and sponsorship activities.

This meant EBITDA margin fell sharply from 37.6% in FY11 to 23.2% in FY12.

Competitive pressures

The concerning aspect of the promotional activities expense was that TAH felt the need to boost its profile from increased competition. The explosion in online betting over the past few years has intensified competition in the wagering industry.

TAH has recognised this change and part of the reason behind its FY12 margin contraction was the amount of money it is being forced to spend on technology upgrades at its Trackside, Fixed Odds and self-service terminals.

Highlighting the competitive threat, Bet365, UNiTAB and Tom Waterhouse Betting have begun making their presence known in the past six months by ramping up advertising.

To boost its own profile, TAH needs to increase technological and advertising spending, which is going to be detrimental to margins in the short-term.

Outlook

Unfortunately for TAH, FY13 has got off to a shaky start.  1Q13 wagering revenue fell 2.4% on-year, with the result hurt by the changes to the Victorian Wagering and Betting Licence terms.

TAH was awarded a 12 year wagering and betting license by the Victorian government in July 2011 for $410 million. A tough trading environment in the Victorian and club network contributed to the fall in wagering revenue.

In our view a continuation of the weak trading conditions will limit revenue growth in FY13, putting further pressure on already strained profit margins.

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Origin Energy (ORG) is involved in gas and oil exploration and production, power generation and energy retailing.

As a leading Australasian integrated energy company, ORG participates in most segments of the energy supply chain, including natural gas and oil exploration and production, electricity generation, and energy retailing.

The group has significant operations in New Zealand through its 52.8% interest in Contact Energy, New Zealand’s largest energy provider. ORG and Conoco Phillips each hold a 37.5% stake in the Australia Pacific LNG Project (APLNG), which supplies gas to power stations in South East Queensland.

ORG also has a 42.5% stake in the Victorian BassGass project (AWE owns 57.5%), which supplies gas to Victoria from the Yolla gas field in Bass Strait.

Weak start to FY13

It was a disappointing September quarter for ORG, which reported a 3% year-on-year on fall in revenue to $224.5 million.  This was despite a rise in average selling prices.

Production of 33.1 petajoules (pj) was 10% lower than the same period the year before as BassGass was shut down due to the Yolla Mid Life Enhancement project.

Whilst BassGass has come back on line, it has been a major headache for ORG.  The project’s cost has blown out from the original $345 million estimate in 2009 to up to $580 million.

The September quarter production numbers followed a solid FY12 result that included a 33% lift in underlying profit to $893 million. The Energy Markets business experienced strong 33% growth in underlying EBITDA, with electricity volumes rising 26% following the acquisition of NSW’s power assets.

Offsetting this, however, gas volumes in Victoria and NSW fell during the year due to mild weather.  Also, ORG was forced to pay more for natural gas and electricity, which impacted gross margins.

Poor FY13 guidance

ORG’s FY13 guidance was disappointing to say the least. The group forecast no growth in underlying profit, citing fewer new capital investments, volatile commodity prices, regulatory uncertainty and changing demand patterns in Australia.

Capital spending plans have been curtailed, with ORG instead focussed on the delivery of APLNG. As a result of this change in strategy, ORG recorded significant impairment of projects in FY12 including Transform Solar, wind and geothermal developments and other upstream assets.

ORG’s share of APLNG underlying EBITDA fell 25% on-year, driven by the group’s sell-down of its stake to 37.5% following an agreement with Sinopec, which upped its share from 15% to 25%.

ORG failed to provide clarity on the timeframe for the remaining divestiture of its APLNG stake.

Outlook

For ORG, the significant scale back of its capital spending plans signals a diminished growth outlook. Sentiment towards ORG has worsened considerably since the FY12 profit release in late August, with investors taken aback by the weak FY13 outlook.

We expect the negative sentiment to continue in the near-to-medium term, which is likely to further weigh on the stock price.

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Toll Holdings (TOL) is Australasia’s largest provider of integrated logistics services.  The company’s assets are wide-ranging in the transport space, and cover trucking, rail, air, shipping and ports.

It generates annual revenue of $8.2 billion and operates an extensive network of over 1,200 sites in 55 countries, with in excess of 45,000 employees.

The group is divided into six segments: Toll Global Express, Toll Global Logistics, Toll Global Forwarding, Toll Specialized and Domestic Freight, Toll Domestic Forwarding, Toll Global Resources

FY12 results

TOL’s FY12 results were disappointing to say the least. On a reported basis, FY12 NPAT was $71 million, a 75.9% decrease on the FY11 numbers. The result was hampered by a $215 million impairment charge relating to Toll Express Japan (Footwork Express) and properties in Australia.

FY12 EPS on an underlying basis was 41.4 cents per share which was a 7.1% decrease on the prior year’s result. The fall in profit came despite a 5.9% increase in sales revenue, which is evidence of a contraction in margins.

Pressures

TOL seems to be fighting a war on several fronts at the moment, with many of its operations under pressure. The group’s domestic operations are being squeezed by rival Linfox, which is pricing its services aggressively in an attempt to gain market share.

This is a trend we think will continue over FY13, and TOL’s margins are likely to contract further as it becomes forced to respond to Linfox’s pricing moves.

We also expect Toll Global Resources to come under pressure, with our major concern being its leverage to the mining capex cycle. As miners cut back their capital expenditure we expect TOL’s resources division to also face some hardships.

Outlook

TOL did not provide any specific guidance for FY13, but management did indicate earnings growth could be achieved without a macro recovery. We think management are being optimistic and are setting up their shareholders for disappointment.

Overall we cannot see much positive news on the horizon for TOL and as such there is likely to be further weakness for its share price.

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Mirabela Nickel (ASX:MBN) is a mining company focused on the production and sale of nickel concentrate.

The miner’s key asset is the Santa Rita nickel operation in Bahia, Brazil.

MBN achieved its production ramp up goals in 2011, successfully upgrading the Santa Rita’s plant capacity to 7.2Mtpa of ore milled, from 4.6Mtpa in 2010.

However the ramp up was also accompanied by rising cash costs, which detracted significantly from an otherwise solid set of December 2011 quarter production numbers.

Costly cash

Mirabela Nickel announced its December quarter production report today.

Nickel output climbed 9% from the previous quarter, helping MBN to meet its 2011 production target of 15,854 tonnes.

However the production numbers were overshadowed by a disappointing rise in cash costs.

Cash costs jumped 11% on the quarter to US$7.42, as the higher output was accompanied by higher plant costs and lower productivity.

Additionally, mining costs rose amid increased expenses relating to drilling activity.

The ramp up in quarterly production was thus poorly executed due to the company’s own efficiencies as well as industry cost pressures.

Risk on

Another concerning aspect of the production release was the almost 50% fall in MBN’s cash holdings from the prior quarter.

A significant part of that outflow was due to the closing out of the company’s nickel and copper hedges.

The lower cash balance in addition to a new US$50 million debt facility entered into by a Brazilian subsidiary, raises MBN’s risk profile in a period of economic uncertainty.

Outlook

MBN has raised its 2012 production guidance, targeting 20,000 – 22,000 tonnes of nickel output.

As mentioned, however, greater output is not necessarily a good thing when it is accompanied by higher cash costs.

Mirabela Nickel has commenced a cost reduction program, which aims to lower cash costs towards US$6/lb by the end of the year. However that is largely dependent on the proper implementation of the program.

Although a return to steady state production may help, cost reductions will also be linked to the favourable renegotiation of MBN’s major contracts.

Having recently closed out of its nickel hedges, MBN is now fully exposed to the movement in commodity prices.

Unfortunately, there is also considerable uncertainty surrounding nickel prices, with brokers Morgan Stanley and Goldman Sachs recently downgrading their forecasts amid concerns about oversupply.

We at Australian Stock Report believe these headwinds are likely to weigh on MBN’s share price for a while yet.

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Kagara (ASX:KZL) is a copper, zinc-lead and nickel miner, with operations in North Queensland and WA. It has four operational hubs in North Queensland – Mungana, Mt. Garnet, Balcooma and Thalanga.

KZL’s North Queensland mines supply ore to three treatment facilities in Mt. Garnet (copper and polymetallic) and Thalanga (polymetallic).

A strategic review determined KZL’s nickel operations at Lounge Lizard, WA to be non-core, and so the group has put the assets up for sale.

The company faced major operational issues in FY11, which culminated in a $32.2 million loss.

An uncertain outlook for commodities has come at a poor time for Kagara, with its recently announced capital raising highlighting potential cash problems at the company.

Although KZL recently unveiled a five year turnaround strategy, we feel there are significant near-term headwinds that are likely to keep its share price under pressure.

Operational issues

KZL’s September quarter activities report revealed a 3% fall in copper output from the June quarter. However that was balanced by a 13% rise in zinc output.

Cash costs for both commodities fell on the quarter, reflecting the company’s focus on protecting its margins in the face of declining prices.

The quarterly output result followed a hugely disappointing FY11, which was characterised by a $32.2 million loss (compared to a $3.2 million profit in FY10).

The loss came on the back of a $48.5 million write-down of KZL’s Mt. Garnet and Mungana mines (Mungana Mines: MUX is 61.9% owned by KZL).

Production over the year was impacted by a prolonged wet season.  This was accompanied by rising cash costs over the year, which came about due to lower zinc output and adverse FX movements.

Uncertain commodities outlook

Europe’s debt crisis coupled with signs of a slowdown in Chinese economic activity has clouded the outlook for KZL’s key commodities – copper and zinc.

Copper has slumped around 17% from the highs it created in July, whilst zinc has suffered similar falls amid persistent concerns about global oversupply.

Copper is usually seen as an economic barometer, and its recent weakness suggests diminishing prospects for global growth.

Although longer-term we expect stronger demand for the red metal, we see more weakness in the near-term as Europe struggles to end its debt crisis.

Cap raising highlights problems

Kagara’s problems ultimately led to a $25 million capital raising (completed today), which it said was to finalise the acquisition of the Einasleigh Copper Deposit at Mt. Garnet.

Einasleigh was bought from Copper Strike (CSE) for $16 million, as part of KZL’s push to ramp up production in the next five years.

The announcement of the raising was surprising considering it came less than three months after KZL unveiled its five year turnaround strategy.

The capital raising suggests KZL is facing cash problems, with the group in a precarious position as it looks to significantly increase exploration activities in North Queensland.

Worryingly, this leaves KZL vulnerable to continued declines in copper prices and any unforseen production delays.

Outlook

KZL has been hit hard in recent times due to operational issues at its mines.  A prolonged wet season led to production delays and write-downs at Mt. Garnet and Mungana, which was reflected in a massive loss for FY11.

Although KZL is to embark on a five year turnaround strategy, it has set itself lofty exploration and production goals. The group aims to produce 30,000tpa of copper by FY15 (FY11: 22,530t) and 71,000tpa of zinc by FY14 (FY11: 40,125t).

KZL’s immediate focus, however, is on ensuring it has enough cash to cover near-term development expenses.

The recently completed capital raising is a worrying sign, and suggests KZL has little room for error in a very uncertain global economy.

A worsening of Europe’s debt crisis could see copper prices come under further selling pressure, thus impacting KZL’s margins.

As a result, we feel there is further near-term weakness in store for KZL’s share price.

KZL’s woes have seen it being a major mover on the ASX, it has plummet more than 60% in 2011.

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Sims Metal Management (ASX:SGM) recycles ferrous and nonferrous metals and other materials ranging from other metals to plastics, electronics tyres and refrigerators.

The company has operations in Australia, New Zealand, North America and Europe.

SGM fell heavily over the GFC as commodities crashed, and has since failed to make a significant recovery as the scrap metals market has failed to see a solid price recovery.

A continued deterioration in scrap metal demand bodes poorly for SGM, which has recently reported a string of very disappointing financial results.

Its recent FY11 earnings were fairly robust but SGM’s outlook remains uncertain due to global market volatility.

FY11 results impress

Sims Metal Management had a tough start to FY11 after reporting a 75% on-year plunge in 1Q11 net profit to $8.2 million.

EBIT for the period also slumped 69% to $16.7 million, with SGM attributing the poor result to lower scrap intake, and constrained scrap flows and margins.

Last month, SGM reported a FY11 net profit jump of 52% to $192.1 million, with underlying profit of $182 million topping analyst estimates.

A final dividend of 35 cents was declared. Revenue was up 19% on-year amid stronger scrap shipments and improved pricing.  Intake was higher across all regions, which helped drive profit growth.

An improvement in its US operations was a big contributor to the results. However, no guidance was given due to the global economic uncertainty.

Global pain

Nearly 85% of SGM’s earnings are from North America and Europe. These areas are currently experiencing significant problems with a looming euro debt crisis.

Global difficulties in the form of US political gridlock, that country’s first ever credit downgrade, continued European sovereign debt fears, and Chinese inflationary pressures have prevented SGM from providing guidance.

We have also seen the Aussie dollar rally significantly over the past year, adding to the challenges SGM is already faced with.

A higher Aussie dollar results in SGM reporting lower earnings from its overseas operations.

During the last wave of global uncertainty, SGM went through a string of disappointing financial releases.

Looking ahead

SGM has not provided any specific outlook, due to a lack of clarity regarding future economic conditions that could affect scrap flows.

As such it has been one of the shares to sell in recent months.

With a history of disappointment during tough global periods, we feel SGM is not out of the woods yet.

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