Is Newcrest a buy under $20?

Trading below book value – is Australia’s largest gold miner a bargain?

Newcrest Mining (ASX: NCM), Australia’s largest gold miner and one of the top five producers in the world, has seen its share price fall more than 50% since April 2011, and is currently trading at less than book value.

Over the same time period, gold has rallied from US$1,430 an ounce to over US$1.900 an ounce, before falling back to around US$1,580 an ounce currently. All else being equal, Newcrest’s share price should theoretically be higher, especially when you consider the latest annual results.

In 2012, the company produced 2.3 million ounces of gold, as well as 76,000 tonnes of copper, resulting in statutory profit rising by 23% to $1.1 billion. Current reserves of gold sit at 87 million ounces, with 13 million tonnes of copper. Operating cash flow was $1.7 billion, and gearing is fairly low at 12.5%. The company even increased its dividend to 35 cents, a rise of 17% over the previous year.

The price drop suggests not all is right with our largest gold producer. While most gold stocks have been hammered in recent times, well beyond the falls in the price of gold, Newcrest’s slide is significant. At current prices, Newcrest is trading for less than its book value, which was $19.87 at the end of December 2012, suggesting either its assets aren’t worth as much as the accountants see them, or its shares are a screaming bargain.

With $3.7 billion of goodwill, much of it from the takeover of Lihir Gold in 2010, and another $8.7 billion of capitalised exploration, evaluation and development expenses on its books, it’s clear Newcrest’s book value of $15.2 billion is mostly made up of assets that, at worst, could be worth much less than their recorded book value. It seems clear that the price discount to book value therefore is irrelevant, and it’s no screaming bargain. A substantial writedown of its intangible assets could be coming.

On many other measures, Newcrest fails to impress. Return on equity in 2012 was just over 8%, and has been falling over the past three years, while the P/E ratio currently stands at 18.8 times – not exactly cheap. Capital expenses have been higher than cash flows and more than double the company’s reported profit in the past three years, resulting in rising debt levels.

The company also fails to impress from a management perspective. Problems at its mines appear to crop up on a regular basis, impacting on production, and pushing up cash costs. Production forecasts are often downgraded as a result, and in hindsight appear to have been overly optimistic. The acquisition of Lihir now appears to have been done at the top of the market, requires substantial capital and one wonders whether Newcrest is ruing its decision.

Foolish takeaway

On a positive note, Newcrest has impressive reserves of gold and copper along with diversified producing mines. The main problem for investors in the company appears to be one common to many gold miners. The constant capital spend on drilling and exploration (or acquisitions) to replace a depleting resource, means most shareholders are left with nothing but high expectations. That situation doesn’t appear likely to change anytime soon. For investors looking for gold exposure, Silver Lake Resources (ASX: SLR), Northern Star Resources (ASX: NST) or Kingsrose Mining (ASX: KRM) appear to be better bets.

Oil prices are set to rise dramatically over time. With limited supply — recent estimates suggest we only have enough oil to last 40 years — and growing demand from quickly expanding economies like India and China, oil prices can’t help but go up. Position yourself to profit from this trend now, with The Motley Fool’s brand-new FREE research report, 3 Oil Stocks to Send Your Portfolio Gushing HigherClick here now, it’s FREE!

More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King owns shares in Silver Lake.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of January 12th 2022

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »