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Is it time to buy Newcrest?

Whilst it was the mining stocks that predominantly drove the Australian economy for well over a decade, the industry has become largely out of favor amongst Australian investors in recent times.

Over the last 12 months, the S&P/ASX 200 (ASX: XJO) (^AXJO) has climbed a total of 18.6%, led by some of Australia’s largest companies such as the supermarket behemoths, the big four banks and Telstra (ASX: TLS). In comparison, Australia’s largest miners, including BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue Metals  (ASX: FMG) have acted as a drag on the market, with the overall resources sector down 4.8% for the year.

Shockingly, the losses that have been felt by shareholders in the companies mentioned above prove to be quite minimal when compared to those felt by Newcrest Mining (ASX: NCM). Newcrest, Australia’s largest gold miner, has had a disastrous run over the last two years, having fallen rapidly since CEO Greg Robinson took the reins in July 2011. Since that time, the company’s shares were sitting above $40 and have fallen to where they now sit – at an 8-year low of $13.40 in yesterday’s trading.

After falling over 5% Wednesday, Newcrest again found itself dragging the market down yesterday – down a further 6.3%. Having fallen so heavily, could the company be considered a buy?

Why has Newcrest been smashed by the market?

Just as Rio Tinto and BHP rely on the price of iron-ore, Newcrest relies on the price of gold. The value of the precious metal has fallen 24% to $US1,400 since July 2011, meaning that Newcrest’s profits have been heavily impacted. Furthermore, a series of mining challenges such as poor weather and project delays have caused the company to announce four profit downgrades in the space of two years – which has largely resulted in investors losing faith.

Although the price of gold is out of the company’s control, it is management’s responsibility to ensure the smooth running of projects and to give the market an accurate and fair estimate on future performances. Having failed to do so (and with the shares having been battered since Robinson’s arrival at the company), analysts are predicting that he may only have until the end of the calendar year to turn things around.

On the other hand, analysts at UBS have commended moves undertaken by the company. Although the profit downgrades were largely disappointing, it has been argued that decisions made by the company to warrant the downgrades ultimately preserved cash and deferred capital spending.

Wednesdays’s plunge in share price was largely driven by the “sell” recommendation put onto the company by UBS. UBS downgraded its target price from $18 to $12, whilst also downgrading its 2013-14 earnings forecast by $275 million. Citi has a similar view, having lowered its target price by 29% to $13.

Foolish takeaway

Although shares in Newcrest are at their cheapest level in eight years, investors should be extremely wary about adding it to their portfolio. At this stage, it appears that the company is still on the downward trend, and trying to predict a share price low would be impossible, given the volatility of gold as well as the industry.

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

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