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Newcrest share price sinks on drought concerns

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The Newcrest Mining Limited (ASX: NCM) share price plunged more than 5% in early trade after the miner released its quarterly report for the 3 months ending 31 December 2019.  In addition to providing an overview of company’s performance last quarter, Newcrest also warned shareholders that drought conditions could cut production and output levels.

How did Newcrest perform for the quarter?

Newcrest reported gold production of 551koz, an 8% increase from the prior quarter. The increased production was fuelled by the company’s flagship Cadia mine, which achieved its second highest quarterly gold production on record.

Newcrest also reported an improved performance in all-in sustaining cost (AISC) per ounce, which relates to the costs associated with production. Group AISC for the quarter was down $40 from the prior quarter to $859 per ounce whilst Group ASIC margin improved $60 to $597 per ounce. The improvement in AISC was driven by increased production of lower cost ounces.

In an address to shareholders, Newcrest’s CEO Sandeep Biswas cited the company’s Cadia mine as central to improvements in production and AISC margins. Mr. Biswas also assured shareholders that despite the Telfer and Lihir mine productions coming in below expectations, corrective plans are being put in place to improve performance over the next 6 months.

Newcrest also highlighted the company’s inclusion into the S&P/ASX20 index as a major accomplishment for the quarter. 

What else did Newcrest announce?

In its quarterly report, Newcrest also warned that ongoing drought conditions could result in reduced output levels before Christmas. The company’s Cadia mine has implemented significant water saving measures and optimisation in order to combat ongoing and severe drought conditions in New South Wales. This revelation has stunned some investors, as analysts had previously expected water shortages to not affect output at Cadia.

Management warned that internal modelling on current water volumes indicates if rainfall remains at current 1-in-100 year lows, production could be impacted by the end of 2020. However, if rainfall remains at or above the bottom quartile of historical levels for 2020 then production is not expected to be impacted.

Cadia has been the largest contributor to Newcrest’s earnings before interest an tax, contributing more than $1 billion in earnings in fiscal 2019. Drought and restricted water usage could influence the company’s future of expansion for the Cadia mine that will require increased water consumption.

Management forecast gold production for the second half to be higher than the first half , with Newcrest providing guidance of 2,375 to 2,535koz for FY20.

At the time of writing the Newcrest share price is trading more than 4% lower for the day.

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Motley Fool contributor Nikhil Gangaram 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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