Australia | Nov 16 2007
By Greg Peel
Australia’s intrepid gold analysts have just returned from a two-day tour, 450km inland from Port Hedland in north west Western Australia, having fought off the tyranny of distance, the dust and flies, the bruising week-long trek by camel and the loss of one or two junior staff, who some say simply wandered off. Their destination was Australia’s second largest goldmine – Telfer – a 25moz open cut and underground resource pipped only by Kalgoorlie’s Fimiston open mine, which is best known as the Super Pit. As Fimiston belongs to Barrick and Newmont, Newcrest’s ((NCM)) Telfer is effectively Australia’s largest locally owned gold resource, and one of the largest resources on the planet.
But the analysts camped out overnight listening to tales of the Dreamtime from their wise and trusty native guides – tales of woe that told of perennially disappointing grades of ore being recovered from Telfer, and constant production problems that have led the local mob to believe the land is cursed. “Telfer” actually means “place of extreme disappointment for stock market investors hoping to cash in on US dollar weakness” in the local dialect.
The last time the brave analysts deigned to undertake the arduous journey was September 2006, and what a place of desolation they found. At that time the mine was underperforming, the reserve base was under review, and there would likely be another 12-18 months of disappointment according to management. Secretly, road-hardened analysts believed management were doing a pretty poor job. But that did not stop them being constantly surprised by one downgrade after another. Just when they thought the worst of the news was out, Telfer would be downgraded again. It had reached the point where Telfer was beginning to look possibly like a lost cause.
But more recently news had been coming across the telegraph that things were starting to look better out in the Great Sandy Desert. Although fighting scepticism, the gold analysts decided to go and brave the wilds once more – to go and see it for themselves.
And it was worth the trek. There is nothing like seeing a dirty great hole in the ground with your own eyes to get an indication of just how that hole is performing. And what the analysts saw was a lot of sweat and toil. Exhausted mineworkers collapsed at the analysts’ feet, beaten by that one last barrow. The analysts turned to site boss Paul Arndt, who told them Newcrest was “sweating the asset” in order to achieve maximum throughput without having to spend anymore money. The analysts nodded approvingly.
For as much as Telfer’s problems were due to disappointing grades, capital overruns were also an issue. But when each of the analysts transferred the contents of their dusty journals into reports of their trip, the story was the same. Telfer is definitely on the improve. It would seem grade assumptions have reached their nadir. Newcrest is keeping costs down while attempting to increase production, signs of which can already be seen. Merrill Lynch’s Andrew Richards summed up the sentiment: “We came away more confident that Telfer will continue to improve moving forward”.
But there’s always one irritating sad sack in any travelling party, and so our team had to endure the cynicism of Macquarie’s Jim Copland over their billy tea. “Telfer has always been a somewhat problematic operation,” said Copland, “and we believe the balance of risks continues to be to the negative side of current production and cost guidance”.
Will Copland prove correct? Or will Newcrest finally begin to exploit the benefits of its prospect, one which still boasts the exploration potential to ultimately overtake the Super Pit as the country’s largest resource? Only time will tell.
Analysts’ targets on Newcrest range from Deutsche’s $26.65 to Merrills’ $41.00, for an average of $31.30 (up from $29.85 pre-expedition, but more to do with gold price forecasts). The B/H/S ratio is 2/8/0, showing only Merrills and GSJB Were are confident enough at this stage to assume the market has not overvalued Newcrest’s potential.
The others would prefer to wait to see whether the findings of the expedition do not prove fleeting.