Australia | Jul 22 2011
– Newcrest production in line, but costs higher
– Forecasts and targets trimmed
– Investment case remains favourable given expansion potential
By Chris Shaw
Australia's leading producer of gold and copper, Newcrest ((NCM)) updated the market yesterday on both June quarter production and the size of the Wafi-Golpu resource. The information provided largely met market expectations.
Gold production for the period was 700,000 ounces, while copper output came in at 20,100 tonnes. The latter was a little below the expectation of RBS Australia, the result being cash costs for the period were higher than had been anticipated.
As RBS notes, a higher stripping ratio at Telfer drove cash costs to $542 per ounce, this well above the broker's forecast of $470 per ounce. Helping push up costs were industry-wide pressures that drove up fuel, labour and energy costs.
To account for the higher costs, earnings estimates across the market have been trimmed. JP Morgan lowered its earnings forecasts by 6% for FY11 and Deutsche Bank by just over 1%. Deutsche has also lowered FY12 estimates by 4% given the expectation input cost pressures will continue for some time.
Macquarie forecasts have been trimmed by 2.8% this year and 3.3% in FY12. On the back of the changes to earnings estimates, consensus earnings per share (EPS) numbers for Newcrest according to the FNArena database now stand at 143.8c this year and 199.2c in FY12.
The changes to forecasts have resulted in changes to price targets, with JP Moran lowering its target to $47.00 from $49.00 and RBS Australia to $42.29 from $43.74. The consensus price target according to the database is $45.79, down from $46.22.
But higher production costs are not the main story at Newcrest, as the Wafi-Golpu project continues to expand its resource base. Along with the production result, Newcrest management announced a 75% increase to the Wafi-Golpu resource to 26.6 million ounces of gold and 9 million tonnes of copper.
Further increases are expected, Deutsche Bank noting the target is now 40 million ounces of gold and 15 million tonnes of copper. Currently there are 41 drilling rigs at the project, so a further update is expected in conjunction with the profit result next month.
By the final quarter of this year a pre-feasibility study should be released, RBS expecting the focus will be on grade optimisation at the start of mining. Early grades of up to 1.5% copper and 1.2 grams per tonne gold are expected, which RBS notes is significantly higher than the resource grade.
Production in coming years should also receive a boost from a mine optimisation plan at Lihir Island, which also returned positive exploration results during the period. BA Merrill Lynch expects exploration and a general improvement in operations will act as catalysts for the share price moving forward.
The expected increase in production in coming years is significant, as Deutsche Bank sees potential for total production for Newcrest to hit 3.4 million ounces by FY14 compared to an expected 2.7 million ounces this year.
The upside potential is enough for stockbrokers to remain positive on Newcrest, the FNArena database showing the stock is rated as Buy six times compared to two Hold ratings. One Hold comes from RBS Australia, the broker downgrading from a Buy rating on valuation grounds as the share price is within 4% of its price target.
This is partly explained by RBS having one of the lowest price targets for Newcrest. If we take RBS Australia and Citi out of the equation, the average price target for the other six brokers in the database is $47.00.
The Buy case for Newcrest is summed up by UBS, who remains of the view Newcrest offers exposure to world class assets such as Wafi-Golpu and value creation from a ramping-up of operations at Cadia East, Rideway Deeps and Lihir MOPU over the next 12-24 months.
Shares in Newcrest are weaker today and as at 11.10am the stock was down 42c at $40.18. Over the past year Newcrest has traded in a range of $32.36 to $43.71. The current share price implies upside of around 13% to the consensus price target according to the FNArena database – with additional upside potential, say the above mentioned stockbrokers.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
