Three tough observations on Newcrest Mining’s annual results

The annual results reported by gold miner Newcrest Mining (ASX: NCM) last week were largely in line with investor expectations. Big write-downs and falls in revenue were the order of the day. Here are three blunt observations that shouldn’t be missed.

1. Costs remain a big problem

Mine production costs for the 2013 financial year were up 9% across the group, while gold production was down 8%. According to the report this was caused by an increase in energy and labour costs and more ore processing.

Newcrest was once applauded for the low cost of its operations, however, on an ‘all in’ basis costs are now among the higher levels of Australian gold miners. The company recorded all-in costs of $1283 per ounce for the year to 30 June 2013, which compares to around $1168/ounce for Silver Lake Resources (AS: SLR) and $891/ounce for Alacer Gold (ASX: AQG).

Higher costs contributed to a significant fall in Newcrest’s operating margins, down from 36% to 20% year-on-year. Just how much cost can be stripped out without sacrificing production will be a huge focus in the next 12 months.

2. Growth is off the table for at least the next year

When Newcrest bought Lihir Gold Limited in 2010 for $9.5 billion it was sold to investors as being a significant avenue for growth over the next five years. Three years in and the asset has been the source of more than half of Newcrest’s massive $6.2 billion in impairments and plans to further develop Lihir for growth have been put on hold.

Lihir is of significance because of its size and its long reserve life (more than 30 years). Estimated gold production has been cut from more than 1 million ounces per year to between 700-800 thousand ounces.

Newcrest has scrapped its final dividend to preserve cash, but with no growth on the cards investors will need to see the company making big progress in turning things around to warrant sticking out the tough times.

3. No update on ‘analyst briefing’ investigation

This is not a case of ‘no news is good news’ for investors who deserve a fast investigation and speedy resolution into the scandalous analyst briefing situation.

Listed amongst the company’s 2014 objectives was “regain Newcrest reputation” and this will not begin until shareholders are comfortable management are acting in their best interests. The possibility of two class action lawsuits against the company is all the more reason to clear the air and move on.

Foolish takeaway

Newcrest has a lot of hard work ahead of it to find the diamond amongst the current rough of the company. If it can prove to investors they are capable of it, the company may stand a chance at redeeming its reputation.

Interested in our #1 dividend-paying stock? Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.

More reading

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

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.