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Is the Newcrest share price a buy?

The Newcrest Mining Limited (ASX: NCM) share price has been in the spotlight this week, and in a good way too. It’s only Tuesday, but already Newcrest shares are up around 5% this week, and 15.8% over the past month. Investors seem to be scrambling to get a hold of the ASX’s largest gold miner’s shares. Why? Well, as a gold miner, Newcrest is an obvious beneficiary of a higher gold price. And that’s exactly what we’ve seen in recent times. So is there still time to buy Newcrest shares?

All that is gold does glitter

Watching the gold price this week has been extraordinary, to say the least. Gold was trading for around US$1,820 per ounce just last week. But this week, the yellow metal has moved decisively higher and has broken through its previous all-time high of US$1,921 per ounce, going as high as US$1,977 over the last day or two.

As a gold miner, the Newcrest share price is somewhat leveraged to the price of gold. That’s because a gold miner has a relatively fixed cost of extracting an ounce of gold for sale. Thus, if the gold price rises, the miner’s profit will rise by a multiple of that rise.

Let’s look at Newcrest as an example. In its 2019 annual report, Newcrest told investors its average cost of extracting one ounce of gold was around US$738. When gold was asking US$1,820 per ounce, it gave Newcrest a profit of US$1,082 per ounce. But now that gold has risen 8.6% to US$1,977, Newcrest’s profit margins theoretically rise by 14.5% to US$1,239 per ounce.

Using this methodology, we can understand why Newcrest shares have been shooting through the roof recently.

Is the Newcrest share price a buy today?

Of all the ASX gold miners, Newcrest is my favourite. According to the 2019 annual report, the company has estimated gold reserves of approximately 54 million ounces, which implies the company can sustain its current production levels for at least another 20 years without new supplies coming online. And on current gold prices, these 54 million ounces have a theoretical value of US$106.76 billion (~A$150 billion). Even after the recent run in Newcrest shares, the company is valued at around A$30 billion. Not a bad deal, in my opinion!

Of course, it’s probably only advantageous to invest in Newcrest shares today if you think the gold price will either stay at its current levels or mover higher over the next few years. I happen to think there is a strong possibility this will occur, given the current state of the global economy and the levels of monetary easing that governments around the world are undertaking. But predicting commodity prices is a very difficult game, so keep that in mind if you’re considering an investment in Newcrest right now.

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Motley Fool contributor Sebastian Bowen owns shares of Newcrest Mining Limited. 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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