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3 reasons you should own Newcrest Mining Limited shares

What: Shares in Newcrest Mining Limited (ASX: NCM), the largest gold mining company listed on the S&P ASX 200 Index (ASX: ^XJO) have risen almost 11% since the beginning of June. This mirrors the move in gold prices that climbed from about US$1,245/ oz to around US$1,326/ oz over the same time.

So What: The recovery in gold prices is partly due to the geopolitical events happening in Iraq and Ukraine, which puts a little fear in the market. Traders begin buying up gold as a hedge against inflation and stockmarket anxiety.

Now What: On top of this gold rally, here are three reasons Newcrest Mining could improve earnings and gain in share price.

1) Gold production costs

The company is cutting production costs and processing higher ore grades of gold to get its all-in sustaining cost down as much as possible. At 31 December 2013, it achieved an all-in sustaining cost of about US$925/ oz. As gold goes higher, the potential earnings margins widen from such a low cost base.

2) Capital expenditure needs down

As some of Newcrest Mining’s mines are moving from a development phase to production, its capital expenditures are decreasing. As gold production rises, costs will come down and open a better earnings spread.

3) New mine opening

Although Newcrest can’t change the price of gold, it can improve its revenue by increasing production. In May it opened its Cadia East gold mine, part of its Cadia Valley operations in NSW. The company expects the Cadia Valley’s overall production to rise to 700,000 ounces of gold in FY 2016 and further still in FY 2017. This a great increase over the company’s projections of 500,000 – 540,000 oz for FY 2015.

It will be good news for Newcrest Mining shareholders if gold can continue its climb. However, I think that the company on its own can raise earnings by better revenues on higher production levels. The stock is offering investors a buying opportunity at current price levels.

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

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