As volatility starts creeping back into world share markets now is the time to consider adding exposure to gold to your portfolio.
Newcrest Mining Limited (ASX: NCM) is the largest ASX listed gold miner and a natural starting point. However not all gold miners are created equal, so here are three things every investor must know about Newcrest Mining before buying:
1. Cost and production
The good news for investors is that for the most recent June production quarter, Newcrest Mining ranked as the lowest cost gold producer of seven major ASX listed companies. Newcrest had an average All-In Sustaining Cost (AISC) per ounce of just $913 for the quarter, beating out other gold miners (in this case Silver Lake Resources Limited (ASX: SLR)) by as much as $484 per ounce.
Newcrest is helped by its significant economies of scale. The company produces over half-a-million ounces of gold per quarter and this is a competitive advantage which is likely to continue driving low costs in the years ahead.
Newcrest expects to produce up to 2.4 million ounces of gold in FY15 and forecasts positive cash flows at a gold price of just US$1,250 per ounce. The low hurdle rate is a good sign for investors that Newcrest’s operational efficiency can continue.
3. Legacy problems
Despite Newcrest’s positive operations, legacy problems still hang over the company.
The most pressing is a class-action lawsuit against the company by listed law firm Slater & Gordon Limited (ASX: SGH) on behalf of shareholders. The suit relates to disclosure of Newcrest’s ASX release of 7 June 2013 which resulted in the company settling with the Australian Securities and Investments Commission (ASIC) for $1.2 million.
Newcrest also has a history of significant asset write downs which could come to $820 million in FY15. This would be on top of $6.2 billion written down in FY13 and up to $2.5 billion for FY14.
To give this context, the total of these three write downs is more that the company’s current market capitalisation.
Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article.