The share price of gold producer Newcrest Mining Limited (ASX: NCM) is bucking the bearish trend of the broader Aussie resources sector. As at today’s open, Newcrest shares have rocketed by more than 30% since the start of February. On Tuesday alone, Newcrest was the only stock in the ASX top 50 to post a rise — it soared by a massive 8.2%.
Newcrest investors would be chuffed with their capital growth of nearly 49% over the last three months — particularly against an Aussie stock market that has declined by more than 5% over the same period.
Why Is This Happening to Newcrest Shares?
Investors have taken heart from Newcrest’s December quarterly report, which showed that Newcrest is growing gold production while lowering its all-in sustaining cost. Newcrest’s management appear to have a firm handle on the profit drivers they can control.
But the one profit driver gold mining managers can’t control — the selling price of their product —tends to have the strongest impact on a firm’s share price.
Over the last two months, the price of gold in New York has rallied by more than 11%. But if you’re an Aussie investor watching Aussie gold stocks, here’s a chart of much greater relevance.
This chart shows the Aussie dollar price of gold — which is to say that it adjusts the US dollar gold price for movements in the AUD. As you can see, the price of gold in Aussie dollars has risen by more than 15% over the last two months.
A surging Aussie gold price partly reflects the ongoing weakness of the Aussie dollar, and partly reflects gold’s rising attractiveness as a haven in times of financial turmoil.
With Aussie dollar gold at a three-year high, many gold stocks that trade on the ASX are hitting new highs. It helps to explain why a stock like St Barbara Ltd (ASX: SBM) turned from a small-cap also-ran this time last year into one of 2015’s strongest performers on the Aussie stock market.
What’s Next for Newcrest Mining Limited?
It will be hard for a large mining stock like Newcrest to maintain such powerful upward share price momentum. Yesterday morning, Newcrest announced that a ‘geotechnical event’ had trapped one of its workers about 300 metres underground in one of its Indonesian mines.
You need look no further than November’s disaster in Brazil which ensnared BHP Billiton Limited (ASX: BHP) to see how safety issues can devastate mining companies. Although yesterday’s news is on a much smaller scale than the Samarco disaster, it’s the kind of event which could prompt regulators to scrutinise Newcrest’s safety policies. Even the whiff of a government crackdown can put serious pressure on the stock price of companies in these situations.
What’s more, investing in a stock like Newcrest is necessarily a punt on the direction of the gold price — the movement of which can make fools of us all. That makes Newcrest a much riskier potential investment than its blue-chip peers in the ASX 50.
Just because a stock is one of the largest on the ASX doesn’t necessarily make it a safe ‘blue chip’ investment. Small moves in commodity prices can make or break resource companies, even big ones like Newcrest. When those moves are favourable, share prices can rally hard — but that risk can cut both ways.
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Motley Fool contributor Tim Dorhmann has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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