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Is Newcrest Mining Limited a buy after its quarterly update?

Shares in Newcrest Mining Limited (ASX: NCM) were down 0.1% to $20.74 on Thursday after the company released its March 2018 quarterly report. The stock is down 10% since the start of the year.

The main event during the period – and the primary cause of the price drop – was the collapse of a tailing dam wall that caused a halt and subsequently a slowdown of production at the company’s Cadia project.

Production volumes

In the three months to March 31, Newcrest suffered a production shortfall. The tailing dam collapse resulted in a 37,000 ounces quarter-on-quarter output decline in Cadia. Furthermore, operations at the company’s Telfer project were affected by adverse weather conditions and high waste-to-ore ratios, causing a 27% decline in production volumes and pushing the mine’s all-in sustaining cost (AISC) above the company’s average realised gold price of $1,341 per ounce.

On aggregate, the group’s gold production fell 6%, and the company had to downgrade its annual guidance from between 2.40 million and 2.70 million ounces to a range of 2.25 million to 2.35 million ounces. Newcrest also lowered the FY 2018 production guidance for copper, its secondary product.

Despite adversity, the group’s AISC remained stable at $826 per ounce, with a cost-price margin of $515 per ounce, 12% higher than the previous quarter.

Cadia project update

The good news for Newcrest is that Cadia will return to full production rates within a few weeks, after the New South Wales government authorised the company to use an old mine pit as an alternative tailing storage facility. This is just a temporary solution, but it will restore Newcrest’s most profitable asset.

In fact, the cost of production in Cadia is extraordinarily low. In the December 2017 quarter, the mine had an AISC of just $129 per ounce, well below the sector average, including low-cost industry peer Evolution Mining Ltd (ASX: EVN) – which reported an AISC of $768 per ounce in its last quarterly update.

Foolish takeaway

I think the pros of this release outweigh the cons. Production volumes were disappointing, but the main issue behind the downgrade will be resolved very soon.

However, I’m not a buyer of Newcrest at this share price. Even after the recent price correction, the stock trades at around 40x earnings, which is very high for the industry – so I don’t think it has bottomed out yet.

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Motley Fool contributor Tommaso Autorino 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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