Australia | Jan 29 2007
By Greg Peel
In a corner of the Great Sandy Desert, nearly 2000 km east of Perth, lies what is meant to be Australia’s biggest gold mine. It is also proven to be Australia’s biggest headache, and most relentless disappointment. It is called Telfer.
If gold analysts had a dollar for every time they have said “this latest Telfer downgrade will probably be the last” they probably wouldn’t have to work as analysts anymore. But it never seems to be the case, and they are very frustrated. It doesn’t pay to look like a fool.
A similar sentiment must be driving the management of Telfer’s owner, Newcrest Mining (NCM). As Australia’s leading goldminer, Newcrest has promised a lot of things to a lot of people. If you take out the rise in the gold price over the past couple of years, everything else has been a litany of bad news.
It would appear, thus, that management doesn’t want to disappoint or frustrate anymore. It has cut Telfer’s supergene orebody gold reserves by 0.5Moz (12%), but will conduct further reserve estimates, reporting in July this year and July next year. Management has put up two scenarios to follow last week’s downgrade – further downgrades will reach 1.1Moz in total, or, on a worst case scenario, 3.1Moz. Similar downgrades are included for copper reserves.
Analysts have groaned once more, and slashed their NPVs. This has led to a round of severe target price pruning, such that the FNArena database average has fallen from $27.76 to $23.94. The biggest casualty was SB Citigroup, which took its target down from $31.80 to $25.90.
Where to from here? Will the “worst case scenario” really be a worst case scenario? As Merrill Lynch puts it:
“Telfer remains a difficult orebody for NCM and the hangover from what appears to be a deficient feasibility study continues to hurt. Having said that MD Ian Smith feels the worst case scenarios are about as bad as it gets. We have heard similar things before from NCM (albeit pre Ian Smith).”
Nevertheless, some analysts now feel we must have hit bottom. Deutsche Bank goes as far as to say “we believe that management, in an attempt to ward off another round of downgrades has taken an unduly pessimistic view”. Deutsche is retaining a Buy on the stock, as is ABN Amro. ABN suggests that the short term is still “rocky”, but that the long term prospects remain positive.
Citigroup has also retained its Buy rating, but mainly because the share price reaction last week ensures a Buy must be retained.
The only broker to Downgrade Newcrest on the news is Credit Suisse, taking it from Buy to Neutral. CS was not impressed, but may grudgingly believe this is the last:
“The Telfer orebody appears to have been overstated and will not generate the margins previously expected. We hesitate to say that the bad news is now all out, although this time it should be the case…”
This takes Newcrest’s B/H/S ratio to 3/7/0. The bulk of the brokers are effectively on a Hold rating as they see Telfer driving the short term no matter what else happens. As it’s hard to be confident about Telfer, it’s hard to be confident about Newcrest, no matter what gold price forecasts are included in calculations.
The other element to consider is Newcrest’s corporate appeal – something held by every Australian resources stock, with the possible exception of the world’s two biggest. As Newcrest is now cheaper, it might be more appealing. But then again, its cheapness is somewhat justified. Will a global miner pick up the risk on Telfer? At least, as most brokers agree, corporate appeal provides some floor to Newcrest’s downside capability.