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Why Newcrest Mining Limited shares could jump on Wednesday

Newcrest Mining Limited (ASX: NCM) was one of the standout low-cost gold producers for the December quarter and shares could be set to jump on Wednesday if the company can repeat the performance.

Newcrest averaged an all-in sustaining cost per ounce of $921 for the December quarter, trumping other gold miners including Silver Lake Resources Limited (ASX: SLR), Northern Star Resources Ltd (ASX: NST) and Kingsgate Consolidated Limited (ASX: KCN).

Newcrest’s scale and ability to target higher grades of ore for production has helped considerably since the price of gold dropped last year and the company has not had any material negative announcements so far for the March quarter.

This could set Newcrest up for a very favourable result for the quarter, especially with the positive movements in the gold price. Since the beginning of 2014 the price of gold has been on a rollercoaster ride, jumping from US$1,205 to a high of US$1,382, before falling back to US$1,302 today, but it is on track to support Newcrest’s goal of being cash flow positive at $1,450 per ounce.

Encouragingly, Silver Lake Resources has announced an average realised gold price of $1,438 per ounce for the quarter, up from $1,371/oz in the December quarter, a rise of almost 5%.

A strong result is crucial for Newcrest given some analyst forecasts for gold to sink as low as US$1,100 per ounce by later this year, driven by lower systemic risk in global economies and the probability of rising real interest rates.

Rising interest rates make interest bearing investments like bonds and stocks more attractive than gold. Added to this is the gradual creeping up of the Aussie dollar against the USD which could take some of the shine off margins for gold producers.

Foolish takeaway

Investors will be keenly awaiting Wednesday’s result to see if Newcrest can maintain its cost advantage and grow operating margins on each ounce of gold produced.

If Newcrest can grow production, keep costs level and achieve a higher price for the quarter investors are likely to reward the company with a higher share price.

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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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