Australia | Jul 25 2008
By Chris Shaw
Given the issues the company has had in bringing the Telfer project on stream to deliver a solid quarterly production report that met market expectations is something of an achievement for gold and copper producer Newcrest ((NCM)), but Deutsche Bank suggests the last quarterly should be just the start of better things to come for the company.
The good news starts with Telfer itself as grades have been higher than the broker had expected, which has seen it lift its forecasts to a level in line with previous guidance from management. Exploration success around Telfer is another positive as the broker notes a new polymetallic deposit has been identified, while PNG exploration is also set to deliver at least one additional project for the company.
To reflect the number of new and expanding projects the group has on its books the broker anticipates a significant upgrade in reserves when the company reports earnings next month (expected August 19th), with its early numbers suggesting a 40% increase to around 69 million ounces. This is unlikely to include the PNG or Namosi projects, meaning further upgrades can be expected going forward.
The other positive for the group is on the cost front as while it is having to deal with higher input costs, just like every other mining company, its cash costs for production remain low when compared to peers. There should also be some capex advantages as well with the shift from open pit to underground mining at Cadia East in the broker’s view.
While Deutsche Bank rates the stock as a Buy at current levels UBS disagrees and has downgraded to Neutral from Buy, suggesting while the new projects offer upside they also introduce additional execution risk. As well the broker sees little in the way of short-term production growth from the company, which suggests its downgrade in rating is valuation based as well.
It is a view shared by Macquarie, which regards the stock as offering outstanding exposure to the gold sector but not outstanding value at current levels, particularly as the broker’s earnings estimates were cut modestly post the result to reflect rising cost pressures.
Citi has gone the other way though and upgraded its rating to Buy, not so much for the shorter-term as it has trimmed earnings forecasts both this year and in FY09 but for the longer-term as the group’s new projects come on stream. To reflect the upside it sees from both higher production and expected stronger gold and copper prices the broker has lifted its earnings forecast in FY10 by more than 25%.
The expected resource upgrade next month is enough for Merrill Lynch to stick with its Buy rating, the broker pointing out the company is the preferred major gold exposure on the Australian market given its size and production growth profile thanks to the range of new projects it has in the pipeline.
To put a value on these projects and production increases remains difficult as the FNArena database shows Credit Suisse leading the way in terms of a share price target at $45.00, while JP Morgan is the least aggressive at $31.00. By way of comparison the median price target according to Thomson One Analytics is $36.00. The database shows a total of seven Buy ratings compared to three Hold recommendations.
Shares in Newcrest today are weaker in line with the broader market and as at 1.30pm the stock was down 83c or 2.8% at $28.57, which compares to a range over the past year of $23.27 to $40.50.