Today, we will look at why we like Newcrest Mining Limited (ASX NCM).
Ever since the COVID-19 induced crash, we have seen unprecedented levels of money printing from governments around the world.
The crash and subsequent flood of money into the financial system is providing very strong tailwinds for gold – an asset we have been bullish in since October 2019.
As the world continues to muddle through issue after issue, gold will continue to be a safe haven hedge for uncertainty in an uncertain world.
Apart from owning the precious metal directly, Newcrest Mining as the largest gold producer listed on the ASX is a good way to gain exposure.
With rising revenues, large reserves, and gold & copper mines located around the globe, Newcrest is a stock that we like for exposure to gold.
Newcrest Mining Limited (ASX NCM) is the largest gold producer listed on the ASX, with a market cap of A$25.5bn.
It mainly engages in the exploration, development, mining, and sale of gold and gold-copper concentrate.
It currently operates five gold and copper mines globally, two in Australia (Cadia Valley Operations in Ridgeway and Telfer Mine in the Pilbara region of Western Australia), two in Papua New Guinea (Lihir and Wafi-Golpu), and one in Canada, Red Chris.
NCM’s revenue increased 4.8%, from AUD$5.3B to AUD$5.6B FY19-20, and its net income increased 15.3%, from AUD$0.8B to AUD$0.92B FY19-20.
Its P/LTM EPS currently sits at 30x, and it has outperformed S&P/ASX 200 by 44% in the last three years.
NCM – 3Y – Share price history
Source: S&P Capital IQ
NCM – Financial highlight
Source: S&P Capital IQ, MF & Co Asset Management Research
On-going Drilling Supports NCM’s Sustainable Development
Compared to brownfield explorations that generate quick yet unsustainable profit, NCM is committed to investing in greenfield projects to support its longer-term vision of being a leader in the global gold mining industry.
The most recent fruit born by this strategy was the superior exploration result on the Havieron deposit.
A new breccia zone known as the ‘Northern Breccia’ was identified in the Paterson region of Western Australia.
The results from step-out drilling strengthened NCM’s future cash flow and operation.
Strategic Integration Boosts NCM’s Competitiveness
Newcrest’s core strength is its low-cost operation in the mining of gold and copper from low-grade resources.
It has developed an efficient mining process of extracting copper as concentrate and gold as bullion by investing heavily to streamline its operations and build a reliable supply chain.
As illustrated below, in FY2020, Newcrest invested AUD$1.3B in M&A activities.
It has successfully integrated numbers of technology companies, enhancing its strong technical capabilities.
NCM – FY19-20 Free Cash Flow Distribution
Source: NCM FY20 Investor Presentation
Gold price surges during the COVID-19 outbreak, supporting gold-mining companies, especially NCM
Although there was a recent drop in price, gold has increased by over 23% in value since January.
It reached ten years’ high of $US2, 000 ($2,805) per ounce.
The volatility in gold price is underpinned by the uncertainty in the economy, such as the ongoing outbreak of COVID-19, concerns of delays to vaccine trials, and heightened geopolitical conflict.
The topic of the gold price was comprehensively covered by our previous research and the fundamentals of gold are still strong.
Moreover, NCM has the highest proportion of gold production exposed to gold price in FY20 compared to its peers, boosting its FY20 financial performance.
NCM – 1Y Gold price/AUD
NCM – FY20 Proportion of gold production exposed to the gold price
Source: FY20 NCM investor presentation
Key Advantage and Risk
Australia has the largest share of economic gold reserves globally and there are around 75 gold mining operations.
Top 5 companies in the industry by market capitalization
- Newcrest Mining Limited (ASX NCM)
- Northern Star Resources (ASX NST)
- Evolution Mining Limited (ASX EVN)
- Saracen Mineral Holdings (ASX SAR)
- Regis Resources Limited (ASX RRL)
A high-quality asset portfolio allows the highest production with the lowest cost
Newcrest’s mines are exceptionally cost-effective with long life.
NCM’s primary operation in Cadia has AISC (All-in sustaining cost) of $106/oz in FY20, bringing down the group AISC to $862/oz, the lowest among its competitors.
Moreover, NCM’s annual production of gold at 2171 koz is more than double of Northern Star, the second biggest gold producers.
NCM – FY20 AISC & Gold Production Comparison
Source: Full Year Results Release from
Strong reserve and resource base
NCM’s current gold reserves represent more than 25 years of production at current rates.
As illustrated, NCM has the highest quantity of both mineral resources and ore reserves.
NCM – Gold Mineral Resources & Ore Reserves of Selected Companies
Source: Resources and Reserves Reports
Good News about Existing Operations Eases the Stress of the Burdensome Lihir Project
Newcrest reported an exciting exploration update about additional strong gold-copper intercepts from drilling at the East zone high-grade pod at the Red Chris Mine and the expanded extend of the Havieron mineralised system.
However, Lihir production is hampered by the unexpected lower grades and reduced mill recovery, and guidance for FY21 is weaker than the market expected.
The near-term drop in grade from 2.6g/t to 2.3 to 2.4g/t (FY21-FY23) at Lihir will have a negative impact on the company’s results in the short term.
Nevertheless, there could be room for further optimization to achieve a higher grade.
Poor Demand Forecasting and Product Diversification Cast a Shadow into the Future
Newcrest has been reporting higher days inventory than its competitors due to its weak demand forecasting performance.
Another weakness of the company is that it generates revenue mostly from its core business in gold.
NCM – FY20 LTM Avg. Days Inventory Outstanding
Source: S&P Capital IQ
Solid Profitability and Healthy Leverage Ratio Make Newcrest a Wise Choice
Newcrest has always maintained a high EBITDA growth rate and margin in the past few years.
In the FY19-20, NCM’s EBITDA increased by 10% to $1,835 million, with a margin of 47%.
The profit is mainly generated by its two operations, 71% from Cadia, and 25% from Lihir.
NCM – EBITDA & EBITDA Margin in the past 5 years (%)
Source: NCM Financial reports
Newcrest has always maintained a satisfactory debt to equity ratio below 30% since FY2016.
The net debt/EBITDA is 0.3x, total debt/equity is 24%.
Newcrest Stands Out with low P/E ratio
The company maintains a reasonable P/E ratio of 26.6 taking its high-quality earnings into consideration.
It also has a lower P/B ratio of 2.1x compared to AU Metals and Mining industry average (2.3x) and is considered good value among the top 5 gold mining companies as well.
Solid fundamentals and promising drill results support a strong outlook for Newcrest.
NCM recently outperformed the market mostly due to the rally in gold, but it has more room for growth.
With a long-term focus on greenfield development and strategic acquisition to improve operation cost-efficiency, NCM has managed to become the biggest gold producer with the lowest AISC within Australia.
However, the unexpected lower grade in the Lihir project and the decreasing inventory turnover due to poor demand forecasting may precipitate near-term tailwind.
Nevertheless, our model shows that the sustained gold price would accelerate NCM’s revenue growth, as well as improving its profit margins in FY21-23.
In the unlikely circumstance that gold price plummets in the near term, NCM’s low debt should provide sufficient support for its share price.
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This is general advice only. MF & Co Asset Management has not considered your personal financial needs, objectives or current situation. This information is not an offer, solicitation, or a recommendation for any financial product unless expressly stated. You should seek professional investment advice before making any investment decision.