On Gold Consolidation, Housing And Supermarkets

This story features NEWCREST MINING LIMITED, and other companies. For more info SHARE ANALYSIS: NCM

By Greg Peel

Of all the companies mining gold in Australia, only two of the “majors” are considered Australian owned. They are Newcrest Mining ((NCM)), which also has extensive copper mining interests, and Lihir Gold ((LGL)), which remains largely a single-asset company and that asset is located in PNG.

Gold has been back in favour again in recent years, particularly as the gold price now appears to have left US$1000/oz behind. And where there is interest in gold, it follows that market speculation of a Newcrest takeover offer for Lihir should follow. Credit Suisse is using comparable price/earnings multiples for the two to suggest the market is once again anticipating such a move.

CS notes the market's perception of Newcrest is of a gold company, but one which just happens to mine copper as well (the two metals are usually found together). In actual fact Newcrest's gold reserves total only 47% of the company's total resources so one might more realistically call Newcrest a copper company which also mines gold. The distinction is important, because “gold companies” tend to carry a valuation premium of market perception over “copper companies”. One is precious, one is base.

Newcrest thus has a problem, CS suggests, because its portfolio balance has recently been transitioning away from gold. To retain its “gold company” premium, it must either divest of one or two non-gold assets or acquire another gold asset. Enter Lihir.

Lihir's biggest problem has long been its “single asset” status, with that asset being a gold project on remote Lihir Island in PNG. The project has been beset with delays, cost overruns and accidents and until recently has proven a serial disappointment, despite boasting a world class gold reserve. But the project seems to have its act more together recently, allowing analysts to finally become more confident.

Yet cognisant of the risk of only one real asset, Lihir management has long sought diversification – with unfortunate results. Its attempt to fire up the legacy Ballarat gold mine was no less than a disaster, and that asset has recently been dumped. Its merger with Equigold may prove less damaging, but the Bonikro deposit location in the volatile Ivory Coast is of concern to some analysts.

Credit Suisse believes it would indeed be a good move for all concerned if Newcrest were to take over Lihir. However, CS does not believe now is really the right time.

The analysts currently rate Newcrest Outperform and Lihir Underperform given Newcrest has a raft of promising projects it is currently developing, while Lihir still has to convince the market about Lihir Island's improvement and may yet throw too much good money after bad in its desperate diversification attempts. If the market is hoping for a takeover tomorrow, Lihir is clearly overvalued in the analysts' eyes. So why not wait?

Credit Suisse suggests late 2011 or early 2012 might be more sensible.

James Hardie Industries ((JHX)) believes it has its own pot of gold in the form of Queensland (Brisbane in particular) and that investors are currently too focused on its exposure to a still wobbly US housing market while ignoring the company's potential in the Asia-Pacific region. The company said as much in a briefing to analysts in Brisbane yesterday.

James Hardie has been quietly trying to sway the consumer away from the idea of building everything in traditional brick and onto consideration of lightweight materials such as cement composites instead, and in so doing take market share from its traditional competitors. Success has been found in Brisbane, where JHX controls some 70% of the exterior cladding market. Fibre cement penetration nationally is about 25% at present, the company noted, but could reach 30-35% before too long.

(I don't know about you, but all the houses being constructed near me lately seem to be mostly using concrete blocks rather than clay bricks.)

So JHX has been banging its local drum and trying to bury overwhelming investor fears that the US housing market may yet even head into a renewed slide now that government stimulus has expired. But there are also those who note the James Hardie share price is already factoring in a US housing recovery despite fresh weakness and thus conclude the stock is already overvalued. Is management trying to head off another share price fall?

Brokers in the FNArena database are split 5/3/2 on Buy, Hold and Sell ratings at present.

Queensland might be recovering, but the ongoing JP Morgan local building materials sector survey finds Victoria the strongest state for new housing at present, albeit at modest levels. While yesterday JPM noted the NSW housing market was threatening to slip back into weakness post-stimulus, Victorian builders are noting a big rebound in second or more and investment buyers to replace the hole left by first home buyers now departed.

JPM found Victorian builders to be cautiously positive on the local market, but lacking true conviction. Uncertainty thus remains, the analysts suggest.

Just down the road from every house is a supermarket, and most likely a Woolies or Coles. Credit Suisse has also been going over the recently released interim results of both Woolworths ((WOW)) and Wesfarmers ((WES)) paying particular attention to the food & liquor segment of each.

The analysts conclude that earnings growth at both duopolists was mostly as, if not better than, expected and that steady but not spectacular earnings growth is expected from here. They don't see either player taking a big competitive advantage over the other in the near term.

And to that end they see both stocks presently exceeding their value in share price terms. They have downgraded Woolies to Neutral after a good run and maintain an Underperform rating for Wesfarmers. CS suggests the market is already factoring in too much immediate success for Coles along with a higher coal price adjustment for the wider conglomerate.

On the other hand, Metcash ((MTS)) appears to be losing ground to the duopoly, CS notes, and is now positioned as a “likely serial underperformer”. But the market is on to it and so the analysts rate Metcash as Neutral.

The FNArena database has Woolies on 2/8/0, Wesfarmers on 2/6/2 and Metcash also on 2/6/2.

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