Australia | Oct 24 2008
By Andrew Nelson
Just one month back and we were in the maelstrom that was the beginning of the explosion of the financial crisis, plans were announced, some big American institutions were bailed out while others weren’t, short selling was banned, plans were approved by governments and more plans were announced. In short, it was chaos. But one thing that made at least a little sense was that gold started to rise again as investors finally looked to the safer haven it offered. And Newcrest ((NCM)) rode the wave.
Gold went from the mid-US$700s in early September to over US$900 just a month later and gold bugs were coming out of the woodwork to say I told you so, but less than two weeks later and we’re back down below where we started. I say all of this simply to illustrate that gold, magical gold is no safer a metal to mine nowadays than any other. Newcrest tracked the last month’s rise and fall in gold, not the market, ever linked to its underlying commodity. But commodities, and that means all commodities, are under pressure and so are the companies that mine them.
Yet today’s tally on Newcrest takes the count to 8 Buys and 1 Hold, when the consensus view of its latest quarterly production report was “solid” in the words of three of the six brokers that have reviewed the result. Not excellent, not breathtaking, nor were they awe inspiring. They were “solid”, unless you listen to Credit Suisse, who reckons they were “strong”.
So why has Newcrest garnered two more upgrades to Buy? Let’s look at the comments from UBS and Macquarie, as they were the culprits.
Macquarie notes it was a “solid” quarter, with record levels being produced at Gosowong, Cadia Hill and Telfer deeps, which all went to offset the disappointment of Telfer open pit, which saw good throughput, but suffered from poorer than expected grades. Development and exploration projects were on track and the only downside was the expectation of increasing production costs given the current economic environment.
UBS is another appreciator of the “solid” result, who on top of pretty much confirming what’s been attributed to Macquarie in the preceding paragraph, also notes the solid long-term positioning of the company. You’d think that project developments going according to plan, positive exploration results, a positive outlook for Cadia Valley in the coming year and a very positive leveraging to the AUD/USD dynamic, would be enough.
But what the broker really likes is the long-term value of the significant reserve base of both gold and copper and the expectation of upgrades (Credit Suisse are picking a big one next quarter) to both. Yes, copper and gold are tracking lower and copper, at least, is expected to do so for a while to come. But Newcrest will abide, it is big enough, has money enough and thankfully, gold enough to ensure this is so.
Newcrest is a big, well capitalised, geographically diversified company that produces something that will always have a significant inherent value, gold. The risk, as long as things are going to plan, is limited. And the worse things get out there, the uglier the economic picture, the more attractive the company’s primary product becomes.
Limited risk, bankable operations, solid operating performances with the expectation of more upside equals upgrade, especially in the current environment.
Add to that some fundamentally positive trading propositions, such as Macquarie noting that Newcrest is currently trading at around net present value (NPV), and you’ve got more reason to think there’s upside in the stock. Sure, almost all other resource stocks are trading at a substantial discount to net present value on almost all brokers current forecasts, but even at 1xNPV, Macquarie reckons Newcrest is about as cheap as it’s ever been.
It’s no surprise that Credit Suisse (given its “strong”) is by far the most bullish on the stock, with a target price of $45 sitting at a whopping 155% premium to the current share price. All in all, the average target is $31.59, representing a near 80% upside to today’s price. The lowest target in the database is Deutsche Bank’s $20 and they’re the only broker in the database to not be yelling Buy.
The broker backs up its Hold by confirming that the 1Q08 result leaves the company well positioned to meet its FY09 production targets 1Q08 results have the company well positioned to meet its FY09 production targets and that its stable and diverse portfolio leaves the company in a good position to ride out the current market volatility given its solid operating margins and low gearing position.
So even Deutsche is a fan. its problem lies with the spectre of increasing production costs, while copper is expected to continue to decline and there’s a good chance, in its view, that gold will also soften. All of which could hamper short-term earnings growth. With earnings growth under pressure in the short term, so is the share price, the broker reasons.
At market close today, shares in Newcrest were up 2.2%, or $3.80 at $17.93 and this compares to a 12 month trading range of $18.60 to $40.50.