Australia | Jan 23 2009
By Chris Shaw
Seemingly since work began at the mine, Telfer has been a problem operation for Newcrest ((NCM)) and the group’s December quarter production result showed it was more of the same with Citi suggesting the mine was the major culprit behind what was viewed a disappointing result.
Production for the quarter was 382,600 ounces, down 21% from the September quarter and well below the 14% fall the broker had forecast. This was thanks to additional maintenance and dilution management issues at Telfer, while lower grades at Cadia and Gosowing were as expected.
At the same time as production fell, cash costs rose by a little more than 50% thanks to falling by-product credits (which reflect lower copper prices) and adverse foreign exchange movements, though as the broker points out, all this was largely ofset by higher Australian dollar gold prices.
With lower gold and copper prices expected going forward, ABN Amro has reacted to the result by cutting its forecasts, the broker now expecting net profit of $178.8 million this year against $289.4 million previously. At the same time it has lifted its forecasts for FY10, the end result being in earnings per share (EPS) terms the broker now expects 94c this year and 179.3c in FY10.
Similarly, Bank of America-Merrill Lynch has lowered its EPS forecast for FY09 by 3% to 136c, while its FY10 number has been increased by 6% to 208c. The FNArena database shows consensus estimates of 97.6c and 131.6c respectively, so while the broker is above consensus it is nevertheless comfortable with these forecast given the company continues to generate good margins while anticipating further gains in the gold price in Australian dollar terms.
Given its positive outlook, it is no surprise the broker retains its Buy rating post the result. However, the number of those sharing Merrills optimism is declining as both ABN Amro and Macquarie have downgraded the stock to Hold from Buy post the production report.
The reason for the change is similar in both cases, as recent share price gains mean the stock is regarded not as attractive from a relative valuation viewpoint as had previously been the case. As a result, the FNArena database now shows two Buys and eight Hold ratings. Citi is one of those with a positive outlook, taking the view over the longer-term the company will benefit from what is a world class reserve base and excellent exploration prospects that set it apart from its rivals.
Bank of America-Merrill Lynch shares Citi’s enthusiasm with respect to reserves, estimating an increase of as much as 15 million ounces can be expected when the company upgrades its numbers late this year.
According to the FNArena database, the average price target on the stock post the December production report is $32.13, which is an increase from $31.12 prior to the report. The change is largely on the back of ABN Amro lifting its target to $33.34 from $22.85 to account for expectations of higher profits from foreign exchange movements.
Shares in Newcrest today are weaker and as at 12.15pm the stock was down $1.73 or 5.4% at $30.17, which compares to a trading range over the past 12 months of $16.55 to $40.50.