The other big reason Newcrest shares are being dumped

Lack of faith in management could linger long after gold price recovers.

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It’s hard to tell if the outright dumping of shares in Australia’s largest gold producer, Newcrest Mining (ASX: NCM), is due more to the continuing decline of the price of gold or a startling lack of faith in Newcrest’s management.

It’s certainly true that the company is not diversified in the way that other mining majors BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) are across a number of different commodity types, which helps to spreads the risk if any one particular commodity class suffers. This specialization may make Newcrest an expert in the gold field, but as the price turns south it also amplifies the risk of loss.

However the way Newcrest’s management team handled the announcement of write downs and the added speculation they tipped off key analysts ahead of smaller shareholders seems to be a big factor in the sustained pummelling the share price is taking.

Newcrest shares were down another 2.4% yesterday, bringing the losses from the last five trading days to 17%; almost five times more than the drop in the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) and much larger than the overall drop in gold price.

Newcrest’s handling of the write-down incident flies in the face of the company’s vision to be the “Miner of choice”, a phrase Newcrest was so committed to, it went as far as trademarking.

In an urgent attempt to restore investor confidence today Newcrest announced it will appoint Australian Securities Exchange Chairman Dr Maurice Newman to conduct an independent review of the company’s disclosure and Investor Relations practices.

According to the media release the Newcrest Board is “deeply concerned” about the criticism the company has taken in regards to the disclosure debacle and “will consider all findings and recommendations of the review”.

Foolish takeaway

What started as a slump in the price of gold has turned into a revealing situation for Newcrest investors. A look at the share price suggests many are heading straight for the door.

And with hundreds of strong, well run, dividend paying companies to choose from, it would be hard to blame them.

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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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