Why is Newcrest Mining Limited up 23% over the past month?

What has been a continuing story of gold miners taking a bath with each big slip in gold prices, making one gold mine after another less profitable or in the red, may now be starting to turn around for Newcrest Mining Limited (ASX: NCM).

Gold’s decline

Since late December the miner has seen its share price rise from $7.80 to $9.66, 23.8% up, and for those gold investors who moved a little quicker, since 10 December they received a belated Christmas present of 38.8% gains from the low of $6.96.

Newcrest fell from its September 2011 $40 price level after gold hit a peak of about US$1,900/oz.

In its October AGM presentation, Newcrest reported that it could be free cashflow neutral or positive with gold at A$1,450/oz, or about US$1,392 with a $0.96 AUD exchange rate at that time. Unfortunately, gold was already down to US$1,346, and even for the mines with lower production costs, the falling commodity price cut into each one of them.

Gold’s rise

It wasn’t the first time gold hit US$1,200/oz, which was back in late June actually, but the December low was going to be the second time that the yellow metal would test that support level. Talk was that if it fell below it, we could then see US$1,000/oz before too long.

For a number of days before New Year’s Eve, the price danced around that mark and then on 2 January the price began trending up to where it now stands at US$1,266/oz. That is what gave Newcrest’s share price some legs.

December quarterly update

The share price base seemed to be set in place, but it was the quarterly update that sealed the deal. After concerns of production costs being above the gold price at some of the mines, the company reported that the all-in sustaining cost for almost every one of its mines had been reduced, especially for the Bonikro and Hidden Valley mines which previously had costs well above the company’s average realised price of just under A$1,400/oz.

Out of necessity, the company reduced production of lower grade ore, and concentrated on higher, thereby improving the overall all-in sustaining costs, at least for the meantime. Production at each mine was increased and it focused on cutting production costs along the way.

Foolish takeaway

The company has projected FY 2014 production to be around the upper end of the guidance range of 2.3 million ounces, but it wants to focus on maximising cashflow rather than just production volumes.

Has the gold price rise been merely a reprieve before it falls once more? The financial panic that drove gold up previously isn’t present now, so hoping for a return to those price levels is a big stretch. However, inflationary worries in world markets could sustain the current rally.

Newcrest, as well as other gold miners like AlacerGold (ASX: AQG), AngloGold Ashanti (ASX: AGG) and Regis Resources Limited (ASX: RRL) have a better outlook for 2014 if the gold price holds here, giving them a level they can adjust to.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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