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Why Newcrest Mining Limited might be a bargain

Newcrest Mining Limited (ASX: NCM) is by far Australia’s largest and most important gold miner. It produces over two million ounces of gold from its Australia and overseas mines. So let’s consider how it compares with major world gold miners.

In terms of quantity of gold, combining reserves and resources (i.e. 3P, Proven, Probable and Possible), Newcrest is third highest with 78 million ounces. Number one and two places go to Barrick with 102 Million ounces and Newmont with 88 million ounces.

Using calendar 2013 as a basis for comparison, reserve life (i.e. 2P, Proven and Probable) for Newcrest is highest with 33 years. Next, in order are Gold Fields with 26 years, Goldcorp with 21 years, and Newmont with 17 years.

Let’s consider costs to produce one ounce of gold on a level playing field. Here the “all in sustaining cost” methodology gives a reasonable comparison. Newcrest reported US$886 per ounce for the last reported quarter. That compares favourably with Kinross at US$1,001; Newmont at US$1,002; AngloGold at US$1,015 and Gold Fields was worst for the majors at US$1,054.

Therefore, Newcrest can remain profitable, producing a positive cash-flow, at lower gold prices than four of its major international competitors. That puts Newcrest in a position where it can weather sustained lower gold prices, and can do so for many years. As prices of bullion go lower, high cost operations have to cease production, bringing supply and demand into balance. Newcrest has positioned its operations favourably with respect to all in sustaining costs.

Of course, when the bullion price escalates, all producers increase profits as margins escalate. Those companies that produce the most bullion, will earn the highest profits.

In addition, with a well-diversified geographical spread of mines throughout Australia, Papua Nui Guinea, Indonesia and Africa, Newcrest has insured its future very sensibly. Strikes or repatriation do not pose a serious threat to this company. It is a similar scenario to Rio Tinto Limited (ASX: RIO), which lost its rich copper mine in Bougainville many years ago but was able to sustain its overall performance due to diversification.

In conclusion, I see no overall risk of Newcrest failing to generate profits, year after year, being able to weather the bad ones, as well as making excellent profits during good times.

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Motley Fool contributor Chris Koenig does not have shares in the companies mentioned.

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