It's no secret that the recent gold price slump has brutally hammered many of the top gold miners, particularly Newcrest Mining (ASX: NCM). Since 2012 the gold price has slid 28%, the largest correction in 32 years. Newcrest, whose revenue has an 83% reliance solely on gold sales has felt the pinch and it was clearly visible through its awfully weak 2013 financial year performance.
Coupled with this is its recent overpriced $9.5 billion Lihir acquisition which contributed to massive write-offs of $3.2 billion in 2013 and limited Newcrest's ability to transition into positive free cash flows given unnecessary maintenance expenditures.
Since the 2013 massive sell-off, Newcrest's share price has shed 71%. But one point investors fail to consider is the degree to which a quality company with plenty of potential is trading at a reasonable price-to-earnings ratio of 18, given its current price of $11.03. This is complemented by double-digit earnings growth forecasted by analysts.
Since then, Newcrest then has engaged in strict cost-cutting endeavours to offset its lower-than-targeted gold price and rejuvenate dying margins. These endeavours have resulted in a 16% fall in production costs and a 10% drop in mine site costs in the first quarter of 2014.
What is really important to note here is that Newcrest operates at one of the lowest costs globally. Its all-in sustaining cost of $886 per ounce is significantly lower than that of its major Australian rival Northern Star (ASX: NST) at $1,156 per ounce and less than global peers Kinross Gold (NYSE: KGC) and Newmont (NYSE: NEM) at $1,001 and $1,002 per ounce, respectively.
More favourable cost movements in the future are also anticipated, positioning Newcrest well to offset further commodity price shocks and move free cash flows into positive territory.
Massive reserves and world-class mines also add to Newcrest's cost advantages. Newcrest boasts an impressive 33-year average life span for its mines,which is better than the largest gold producer Barrick Gold (NYSE: ABX) at 16 years. Newcrest also offers better than average expansion potential among its gold and copper mining peers at its undeveloped Wafi-Golpu deposit, providing further expansion potential in the long term.
Newcrest may be highly sensitive to gold prices, but its well dispersed geographical areas of operation is the icing on the cake. Diversified areas of development and exploration in Australia, Indonesia, Papa New Guinea and West Africa, enable Newcrest to dampen the effects of any specific shocks it may face. This resembles highly diversified miners like Rio Tinto (ASX: RIO), which was able to maintain a steady performance level even after the loss of its bountiful copper mine in Bougainville.
Investing in beaten-down companies such as Newcrest comes with substantial risk especially given its inflated $4.5 billion debt position and sustained gold price pressures. On the bright side, world-class mines and comparatively lower costs permit Newcrest to fully capitalize on a gold recovery in the future. To me, the sell-off looks like an overreaction and Newcrest is my preferred exposure in gold. It definitely deserves a spot on your portfolio given current prices.
