Newcrest Mining officially in retrenchment

The tag on the Newcrest Mining‘s (ASX: NCM) Investor Relations web-page reads “Focused on growth”. But in the wake of last week’s news of massive write downs, job losses and a cancelled dividend, Newcrest’s management has announced it is implementing an urgent strategy to do just the opposite — surrender the goal of growth and conserve cash in an attempt to turn around the company’s disastrous year.

Newcrest shares have dropped by 50% in the last six months, closing the day at $11.93 per share yesterday; and have lost 70% of their value since late 2011. The cause has been the deterioration in business conditions from a cocktail of issues including the sharp drop in gold price, high Australian dollar and rising costs, issues also facing miners like BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO).

The retrenchment strategy was announced in the company’s 2014 business plan last week. One of the aims for the 2014 financial year is to cut corporate costs by 20% with a reduction in staff numbers and office closure in Brisbane. Newcrest is also clipping planned capital expenditures by one third, saving $500 million. Remaining capital expenditure of around $1 billion will be spent on the completion of existing projects rather than starting any new ones.

Exploration expenditure is set to be almost halved, from $160 million to $85 million, with focus being shifted away from the discovery of new mines, to extending the life of current mines where the large set-up costs have already been invested.

The reduction in expenditure and cutback on staff is a notable withdrawal from Newcrest’s previous focus on growth, a strategy which produced a record statutory profit of $1.11 billion in the 2012 financial year, up 23% on 2011.

Foolish takeaway

It has been a painful few weeks for Newcrest investors who are riding out the downturn. This is especially so given the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has risen 3.8% in the same six months Newcrest shares have halved in value.

For remaining investors the retrenchment plans may be a slight relief, but with uncertainty around commodity pricing and increasing costs, it could be at least a year until management again starts looking seriously at growth.

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

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