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.
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.
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