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Is Newcrest Mining Limited cheap at the current price?

Australia’s largest gold miner Newcrest Mining Limited (ASX: NCM) has seen its share price slide more than 4% in morning trade, after the company unveiled a massive writedown on its mining operations.

Shares were trading at around $11.00 at the time of writing, well of the lows of $7.82 set in January 2014. The reasons?

Newcrest today announced that it expects to write down the value of its mines by between $1.5 billion and $2.5 billion, which comes on top of last year’s $6.2 billion writedown. Again, it was the company’s Lihir, Telfer and Bonikro mines causing the issues. Lihir was meant to be a low cost mine, but in the last quarter, Lihir saw all-in sustaining costs of $1,313 (US$1,225) per ounce, leaving not much profit at the current gold price of US$1,305 an ounce.

Newcrest purchase Lihir Gold in 2010 for $9.5 billion, but wrote off $3.6 billion of that in 2013, and an additional $1.3 billion on Telfer.

What is concerning for current shareholders is that the current writedowns will reduce book values and increase Newcrest’s gearing ratio by 3% to 6%, potentially forcing the company to raise equity to appease its bankers.

At the end of December 2013, Newcrest had $4.5 billion in net debt, against $10.3 billion in equity. A $2.5 billion write down would leave net debt to equity at 58%, which is uncomfortably high.

Newcrest also faces a shareholder class action, but says it intends to ‘vigorously defend the proceedings’.

Despite those issues, there are some positive signs. All in sustaining costs are falling, and came in at $976 an ounce over the full year, 24% lower than in 2013. Newcrest says it will be cash flow positive in 2015, and the board says it is focused on reducing debt, and progressively returning to paying dividends.

Still, I prefer Northern Star Resources Ltd (ASX: NST), Doray Minerals Ltd (ASX: DRM), Beadell Resources Limited (ASX: BDR) and Kingsrose Mining Ltd (ASX: KRM) ahead of Newcrest. It might appear cheap, but appears to still have too much risk.


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Motley Fool writer/analyst Mike King owns shares in Beadell Resources and Kingsrose Mining. You can follow Mike on Twitter @TMFKinga

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