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Should you buy Newcrest Mining shares?

Shares in Australia’s largest gold miner Newcrest Mining (ASX: NCM) can currently be picked up for a fraction of the price they were trading at two years ago. Yes, the price of gold has decreased by 25% in the last two years, but that’s tiny compared to the 71% decline in Newcrest’s share price.

So should you take advantage of the fear surrounding the company, or is Newcrest on a road to nowhere? Let’s look at some of the positives and negatives.

NCM

Two-year share price of Newcrest Mining. Source: Yahoo Finance

Positives

The current low share price is certainly an attention grabber, leading many investors to ask if the shares have been oversold in panic. It has also bred suggestions that Newcrest may become a takeover target for other gold mining companies. Supporting this argument are the substantial gold reserves Newcrest controls, with estimates of up to 40 years’ worth of production available.

Another positive sign for Newcrest is the purchase of shares by Chairman Don Mercer at the start of the month. The company’s board should be in the best position to know the ins and outs of the business and the action suggests Mr Mercer still has confidence in Newcrest’s potential.

A third positive for Newcrest is the drop in the Australian dollar, which has largely tracked the drop in gold price since May. This means sales of gold in USD are potentially worth more to the company and helps to cushion the impact of lower revenue.

Negatives

The huge elephant standing over Newcrest is, of course, the drop in gold price, which dictates both Newcrest’s cash return and the value of estimated reserves — the company’s key asset. Gold is believed to be losing value because inflation has not increased as many had speculated it would on the back of massive economic stimulus by countries like the US, leading to gold being dumped. Many forecasts suggest this is unlikely to change in the near future.

Cost of production is another huge threat to the future success of Newcrest. In the company’s March 2013 quarterly production update, total average cost of per ounce was $1,086, up almost 30% from $837 the year prior. Higher production costs have also hit gold miners Regis Resources (ASX: RRL) and Silver Lake Resources (ASX: SLR), however Newcrest has undertaken a number of cost-cutting measures that may ease the pain going forward.

Foolish takeaway

Newcrest may have long-term production potential, but without the cooperation of the gold price it is all for nought and returns are unlikely to outpace the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO).

If gold stops falling and goes up, Newcrest could be a winner. But as Joseph Lupton, a senior global economist at JPMorgan Chase quoted in Bloomberg puts it, “gold is an animal in and of itself.”

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

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