Have investors been bitten by the gold bug?
Shares in gold and copper miner Newcrest Mining Limited (ASX: NCM) have rocketed more than 26% so far in 2015 – just six weeks into the new calendar year. And Newcrest is not alone. Northern Star Resources Ltd (ASX: NST) too is up over 26%, while St Barbara Ltd (ASX: SBM) has more than doubled its market valuation.
But given the price of gold is up just 5% over the same period, why has Newcrest Mining in particular taken off? There are three key things that only savvy investors are focusing on:
1. A strong December quarter
Newcrest announced a positive update for the most recent December quarter which has boosted investor optimism that the company could be in for a much improved first half result when the company reports on Friday (13 February).
Gold production for the quarter was up 2.7% and although All-In Sustaining Costs (AISCs) were up 11.5% the costs were lower than anticipated due to higher copper production. By products of gold production like copper are credited towards the calculation of All-In Sustaining Costs favourably and the result has helped Newcrest to remain among the lowest cost ASX-listed gold producers.
2. Increased guidance
The quarterly update also included a surprise increase to production guidance for the full year of up to 100,000 ounces of gold. This will push total full year production up to between 2.3 million and 2.5 million ounces.
Meanwhile, AISCs for the full year could fall by up to $100 million thanks to operating efficiencies, and an increase in forecast copper production. Total AISCs are anticipated to be between $2.3 billion and $2.5 billion, down from previous guidance of between $2.3 and $2.6 billion.
3. Growing confidence
The prospect of growing free cash flow has re-ignited investor confidence in Newcrest after years plagued with heavy write-downs and uncertainty. While it is probably unlikely that Newcrest will reinstate its dividend, the spare cash could be used to pay down debt and reduce gearing which stood at 33.8% at 30 June 2014, improving shareholder equity.
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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned.
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