Newcrest Mining Limited shares drop lower on Cadia update

In morning trade the Newcrest Mining Limited (ASX: NCM) share price has dropped lower after the gold mining company provided an update on its Cadia operation.

At the time of writing the gold miner’s shares are down almost 1% to $20.02.

What was in the update?

According to the update, Newcrest will recommence production at its key Cadia operation today after suspending all mining and processing operations on March 10 following a breakthrough of tailings material at the northern tailings facility embankment.

However, all mined ore will be stockpiled at the surface until processing recommences.

Processing remains suspended for the time being and management is working on multiple recovery scenarios. These include using alternative tailings locations such as the old Cadia Hill open pit.

Because of this, management has advised that it still remains too early for its guidance to be updated.

What will the damage be?

One broker that appears to believe the damage could be significant is Credit Suisse. As I explained a couple of weeks ago, its analysts have retained their underperform rating and $18.50 price target on the gold miner’s shares following the incident.

The broker believes Newcrest will deliver earnings per share of just 19.9 cents in FY 2018 now, compared to the consensus estimate of around 66 cents per share.

Should you invest?

I would follow the advice of Credit Suisse and avoid Newcrest Mining regardless of whether you are bullish or bearish on the gold price.

Cadia is an incredibly lucrative asset for Newcrest and a big contributor to its overall earnings. While management hasn’t blamed this recent issue on seismic events, it certainly has the hallmarks of one in my opinion.

This would make it one of a number of seismic events that have occurred at the site in recent times. This could potentially be a sign that the operation is causing the events, which could ultimately call into question the viability of the operation.

Investors looking to gain exposure to gold might want to consider rivals Northern Star Resources Ltd (ASX: NST) and Resolute Mining Limited (ASX: RSG) instead.

Alternatively, with U.S. rates rising fast investors might want to skip gold miners and look at these top stocks instead.

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