Although the likes of Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) have enjoyed an excellent year in 2016, their performance has been overshadowed by sector peer Newcrest Mining Limited (ASX: NCM). While Rio Tinto and BHP are up by 20% and 8% respectively, Newcrest has risen by over 80% in 2016. More gains could be around the corner for the copper and gold miner for these three reasons.

Sound finances

Newcrest has responded in recent years to the challenges facing the wider resources industry by reducing its balance sheet risk. For example, it now has a debt to equity ratio of 44%, which is down from the prior year’s figure of 53%. Further, its return to profitability in financial year 2015 means that its interest coverage ratio now stands at over six, while Newcrest has been able to improve its cash flow to provide further cover to its debt servicing and repayments.

For example, net operating cash flow was 53% higher last year at $1.6 billion and when combined with a planned reduction in capital expenditure in the current year to between $440 million and $540 million from the previous year’s $564 million, Newcrest’s long term financial viability is improving in my view.

Strategy

Newcrest’s three-phase improvement strategy and the subsequent launch of its Edge transformation plan is helping to improve the company’s financial outlook. For example, during the first full year of the implementation of the plan, Newcrest was able to deliver around $390 million of cash benefits through the successful implementation of numerous improvement initiatives.

Further, the Edge programme has allowed Newcrest to record an improvement in its operational performance and helped optimise how capital is deployed across its asset base to reduce the company’s cost base. This has helped to reduce Newcrest’s all-in sustaining cost to US$789 per ounce for gold, which is a fall of 12% versus the prior year’s figure and makes Newcrest more competitive versus its sector peers.

External factors

Although Newcrest mines copper and gold, it is primarily a gold mining company. Therefore, the upbeat outlook for gold could act as a further catalyst on its profitability and share price.

According to market expectations, US interest rates are forecast to be just 25 bps higher in a year’s time. By 2020 they are expected to be 2.25%, which indicates that the Federal Reserve is likely to remain dovish over the medium term. This would be positive for the gold price since competition from interest-producing assets would be relatively low and gold’s appeal may remain high.

That’s particularly so because of political uncertainty caused by Brexit and the uncertain outlooks for the US and Chinese economies which could cause investors to flock to perceived safer assets such as gold, thereby increasing its price and Newcrest’s profitability yet further.

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Motley Fool contributor Robert Stephens has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.