Why Newcrest Mining Limited shares are sinking lower

Credit: iStock

The Newcrest Mining Limited (ASX: NCM) share price has sunk 5% to $20.51 in morning trade after advising of a breakthrough of tailings material at the Cadia northern tailings dam embankment.

According to the release, an area of the embankment slumped late on Friday following the identification of cracks earlier in the day in the dam wall during a regular inspection. No environmental damage has been identified.

As a precaution the miner stopped depositing tailings into both dams late on Friday to allow management to focus on the evaluation of the event and remediation plans. By Saturday the miner had progressively suspended all mining and processing operations at Cadia.

While Newcrest has not advised on a cause, there is speculation locally that this was another seismic event.

What is Cadia?

Cadia is one of Newcrest’s key assets and based 250 kilometres west of Sydney. It has had a few issues of late limiting production, but ordinarily would be one of its biggest producers.

Not only this, it operates with one of the lowest all-in sustaining costs (AISC) in the industry. In the first-half Cadia enjoyed an AISC of just US$135 an ounce, compared to US$1,086 an ounce at its Lihir operation.

This makes it a big contributor to the gold miner’s earnings, so any significant downtime at Cadia will be noticeable on the bottom line.

Management has advised that at this stage it is too early to estimate what impact this will have on its full-year performance, but acknowledges that it will adversely impact guidance for FY 2018 given the contribution of Cadia to the overall outcomes of Newcrest.

Should you buy the dip?

While I think Newcrest is one of the best gold miners on the ASX with a collection of quality assets, I wouldn’t be a buyer of its shares just yet.

As well as being bearish on gold due to rising rates in the United States, I think Newcrest’s shares look expensive compared to some of its peers such as Northern Star Resources Ltd (ASX: NST) and Evolution Mining Ltd (ASX: EVN).

So if I were inclined to buy gold miners I would look at those two rather than Newcrest, even after today’s decline.

But as I'm bearish on gold I would be buying these top shares ahead of the gold miners. I'm tipping them to smash the gold miners and the market this year.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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 Scott Phillips.

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