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Newcrest Mining: Bargain of the year or fool’s gold?

With more than $8 billion now shaved off the market capitalization of gold miner Newcrest Mining (ASX: NCM), many people from investors to analysts are starting to wonder if the company now represents a real bargain at its current share price.

Shares in the company took a breather from five straight trading days of losses yesterday to close up 0.1%, while the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) enjoyed a cool 1.6% climb.

One of the main arguments in support of buying Newcrest shares is the company’s large gold reserves, estimated to allow production for the next 40 years. It is the largest singly held reserve in the world and with a battered share price several analysts are talking up the possibility Newcrest could be subject to a takeover bid by a rival company.

A canvas of analyst opinions by Bloomberg produced a mixed bag of companies who might be interested in acquiring Newcrest’s assets. These included America’s largest gold producer Newmont Mining (NYSE: NEM), Australia’s third largest gold producer Anglogold Ashanti (ASX: AGG), or even a Chinese gold miner looking to acquire new assets.

Anglogold Ashanti, like Newcrest, has also taken a hammering, recently losing more than half of its market capitalisation this year. The company is currently valued at $1.09 billion compared to Newcrest’s $7.16 billion.

Newcrest may be cheap, but what about the state of the business? The impact of drastic cost-cutting measures taken with Newcrest, reducing staff numbers and overheads, will help the business operate at lower costs going forward and improve margins on the gold it sells.

Of course the one point that really matters is the price of gold itself. All the gold reserves in the world are worthless if no one wants to pay you for it. Mathew Hodge, an analyst for Morningstar in Sydney is forecasting a long-term gold price of $1,200 per ounce according to Bloomberg, while another analyst from Sydney firm CMIB is forecasting a 2016 price of $1,269 – suggesting no long-term increase in price from the level it trades at today.

Foolish takeaway

With a large number of negatives still hanging over it, and no real control over the future pricing of the product it produces, the recovery path for Newcrest is extremely hard to chart. The company’s fortunes are unlikely to bounce back while the price of gold keeps falling, making for a lot of risk and only marginal potential of reward.

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

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