The company trades for less than its recent book value at a price/book (P/B) ratio of 0.82 which indicates one of three things:
1. That investors do not believe Newcrest can generate a significant return from its assets. This is possible given the risk of further gold price falls and potential for production costs to exceed the price received.
2. That the price of Newcrest’s assets do not accurately reflect their real value. This is also possible given the value of Newcrest’s gold mines are linked to the fluctuating price of gold. The company wrote-down billions in assets just last year and expects to write-down as much as $820 million in FY15.
3. That investors are missing the company’s long-term potential and the big gold miner is a bargain for patient investors to buy today.
Depending on your view on gold, it could be some of all three. However as a business Newcrest looks to be in reasonable shape for the year ahead. The company’s outlook for the 2015 financial year hints at growth in gold production and positive cashflows (subject to operating conditions).
Newcrest’s status as a long-life gold miner aligns the company to the interests of longer-term investors and affords the company the ability to ride out gold’s current cyclical woes.
This separates Newcrest from smaller miners like Beadell Resources Ltd (ASX: BDR) and Kingsgate Consolidated Limited (ASX: KCN) and could make the company attractive to investors with a long-term outlook seeking exposure to gold.
Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article