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Is now the time to buy Newcrest Mining Limited?

Australia’s largest listed gold miner Newcrest Mining Limited (ASX: NCM) has put in noticeable efforts to slash costs and return to positive cash flows in the last eight months.

Another positive sign is the 2.5% rise in the price of gold in the last month which trumped the near 3% fall of the S&P / ASX 200 Index (Index: ^AXJO) (ASX: XJO). So is now the time to jump in and buy Newcrest Mining for the long term?

Production

For the most recent December quarter Newcrest increased production by a massive 26% year-on-year, producing 621,125 ounces of gold. This was achieved by targeting higher grades of ore and increasing mill throughput.

The strong group result has enabled the company to maintain its full-year production guidance and target the upper range of 2.3 million ounces which would represent growth of up to 190,000 ounces for the year – more than Silver Lake Resources Limited’s (ASX: SLR) total 2013 full-year production.

Costs

The increase in production was a key contributor to Newcrest’s commendable 16% reduction in all-in sustaining costs for the quarter. As well as lower sustaining capital costs, a “cost-out” focus company-wide helped to keep Newcrest’s costs as low as $921 per ounce, putting it amongst the lowest cost ASX listed producers for the quarter.

Debt

In 2013 Newcrest mining’s net debt ballooned from $2.17 billion to $4.14 billion. Combined with a massive reduction in the company’s equity from write downs, Newcrest’s ratio of debt to total capital rose to 29.5%. By comparison Northern Star Resources Ltd (ASX: NST) has a debt to total capital ratio of just 9.24%.

I would perceive Newcrest’s ratio as high for a company which is subject to gold price volatility. Falls in gold price reduce the value of the company’s assets (its gold mines) which in turn can affect the company’s credit rating and thus the interest rate it pays on debt.

Newcrest has stated it is focused on reducing gearing to around 15% which may divert money from investors or new projects which is a big negative.

Foolish takeaway

As an investment Newcrest Mining is not for the faint hearted. The company has made solid progress turning its operations around since June last year, with both production and costs moving in the right direction.

However Newcrest’s debt levels remain a concern and without a rocketing gold price to drive up equity value (which would reduce the gearing ratio), the expense involved in bringing debt down could sap investor returns. Despite Newcrest’s solid progress, for the time being I will be keeping my hand in my pocket.

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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article.

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