Newcrest writedown: Told you so

As far back as April 8, we warned that Newcrest Mining’s (ASX:NCM) assets weren’t worth their stated book value and that a massive writedown was likely. Today, the gold miner announced an impairment to its assets of up to $6 billion.

Here’s what we wrote,

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.

Along with the impairments of between $5 and $6 billion, Newcrest also announced that free cashflow was expected to be neutral in the 2014 year – in other words “zero”, exploration and capital expenditure costs will be slashed, and the final dividend cancelled. The slashing of capital expenditure is likely to affect several mining services companies, who are already struggling with delayed and cancelled projects by other miners.

Additionally, the company noted that the asset writedown would result in the level of debt to equity rising. Newcrest had previously had an objective for gearing to remain below 15%, but that is likely to now double to between 28% and 30%.

Luckily for the company and its shareholders, there are no ratings triggers or gearing covenants on any of Newcrest’s debt facilities. That could have seen the company forced to raise equity at even more deeply discounted prices, after the share price fell 9% to $12.18, in early trading today.

Foolish takeaway

Many retail shareholders may have been enticed by the fact that Newcrest is Australia’s largest gold miner, with a multi-billion dollar market cap. Here’s the lesson: Not all large cap stocks are blue-chip. Newcrest has no more of an advantage over other smaller gold miners like Silver Lake Resources (ASX:SLR), Regis Resources (ASX:RRL) or Evolution Mining Limited (ASX: EVN), just because it has a larger market cap. After all, they all sell the exact same product, so buyers don’t care if it’s “Newcrest gold’ or ‘Regis gold’.

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Motley Fool writer/analyst Mike King owns shares in Silver Lake.

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