As the Australian share market rises, it pays to remember that value is found not only in under-priced good companies but also in well-managed companies that will continue to provide investors with a reasonable rate of return over the medium- to long-term.
So why choose to buy in to the gold sector when it is at record high prices? When the Newcrest Mining Limited (ASX: NCM) share price is at $30.04, with a high P/E multiple of 28.30?
Three reasons:
First, when a commodity is in demand, producing companies can become compounding machines. The more well-placed capital you add the more they return to shareholders.
Second, gold is a globally acknowledged hedge against uncertainty. While it is tempting to get very "macro" about the gold price, it is enough to say that uncertainty is the new norm of global economics.
Third (and the focus of this article), Newcrest is a well-managed company that will produce reasonable returns, no matter what happens in the global marketplace.
Operations, operations, operations…
Newcrest's underlying financials tell a story of value transformation under Sandeep Biswas since his appointment in 2014. The company boasts growth in earnings over the past 3 years compounded at 14%, higher than most sector counterparts, and a solid 4% compounded growth in underlying shareholder equity since 2017.
On the liability side, long-term debt reduced dramatically in 2016 and has remained at these lower levels while net gearing has dropped steadily from 15% in 2015 to 5% in 2019.
Newcrest as a company is the 5th lowest cost gold mining company in the world, according to S&P Global Market Intelligence. This is largely subsidised by Cadia Valley, the world's lowest cost gold mining operation, but Telfer, Lihir and Gosowong have also seen significant improvements.
This paints a picture of an organisation that is a responsible steward of shareholders' assets. A relentless focus on operational efficiency coupled with a determination to spend capital effectively. This is borne out by recent events and by the level of attention to technological advancement.
Often overlooked and worth mentioning is the company's laser-like attention to worker safety, which is a good theme for a separate article. The results of this are clear in Newcrest's statistics and it represents yet another element of good stewardship of shareholder resources; in this case the workforce.
Building the revenue base
Even more impressive right now is Newcrest's discipline in acquisitions, mergers and partnerships. Miners tend to go a little crazy at the top of the cycle when flush with increased earnings.
BHP Group Ltd (ASX: BHP) tried to buy Rio Tinto Limited (ASX: RIO) at its most expensive, Rio Tinto tried to buy Alcoa Corp (NYSE: AA) at its most expensive, and the gold industry is currently rife with consolidations and mergers.
To date, Newcrest has kept a level head and used earnings to buy stakes in Tier 1 operations rather than paying the premium and managing the risks of large-scale acquisitions. This includes Fruta del Norte via Lundin Gold Inc and Red Chris via Imperial Metals, both of which are long life/low cost orebodies. This will help position Newcrest not only for continuing good times but also for the bad times that inevitably come in a cyclical industry.
Foolish takeaway
Newcrest is Australia's largest gold producer by a country mile, more than twice the size of its nearest rival Northern Star Resources Limited (ASX: NST). Globally it is the 5th largest by market cap.
At best, Newcrest is a hedge against global uncertainty and a capital compounding machine while gold remains in demand. At worst it will provide steady and growing returns due to a structurally lower cost base and a risk averse acquisitions strategy.
For the next 30 days I recommend it as a medium BUY with a share price lower than $31 and hold for the medium- to long-term to get the most out of the rising gold price.
