More Upside From Newcrest’s Wafi-Golpu Projects

This story features NEWCREST MINING LIMITED. For more info SHARE ANALYSIS: NCM

– Golpu site visit well received by brokers
– Exploration continues to return good results
– Project likely to be bigger than previously expected

By Chris Shaw

Newcrest Mining ((NCM)) has hosted an analysts tour of the Morobe Mining joint venture operations in Papua New Guinea, where the company has a 50% interest alongside Harmony Gold Mining Co.

The Morobe region covers both the Wafi-Golpu and Hidden Valley projects, with the former generating the greatest excitement among securities analysts at present. This is due to better than expected project news flow, Macquarie noting recent drill results have included 883 metres at 2.15% copper and 2.23g/t gold.

This result is the highest grade intersection to date at Golpu. The important point, according to Macquarie, is the result extends the mineralisation at Golpu by a further 70 metres to the north. Mineralisation remains open to the north and at depth. 

There are other areas that also require following up, BA Merrill Lynch noting mineralisation has already been identified to the north-east at Miapili, while the area between Miapili and Golpu and areas south of Golpu have yet to be tested.

The results meant BA-ML was similarly impressed, the broker noting grades at the project for both copper and gold appear to be increasing as step-out drilling is undertaken. This suggests the best part of the orebody may have not yet been found, particularly as porphyry type deposits such as Golpu tend to occur in clusters.

As well, BA-ML notes the ultimate size of the resource may approach 800m x 400m. If this proved to be the case it would likely justify a larger mine than originally planned. BA-ML suggests the larger size could support a 35mtpa (million tonnes per annum) project against a concept study of 20-30mtpa.

RBS Australia suggests there is clear potential for Wafi-Golpu to eventually deliver a 30% increase to 2010 resource figures of 501Mt of copper at 0.95% and 0.54g/t gold. This should also mean increases to current production guidance figures of 200-320ktpa of copper and 300-700koz of gold annually.

With an increased project scale capex is also likely to increase. Guidance here is currently unchanged at US$3 billion, but RBS Australia suggests a range of US$4.0-$4.5 billion will likely prove to be closer to the mark.

Even allowing for this increase, the project should be a very positive one, as RBS Australia points out Newcrest has indicated likely operating costs of around US$18 per tonne including mining and processing.

There remain some issues surrounding the Wafi-Golpu project that make assessing a valuation difficult. These include the potential for the PNG government to take a stake, Macquarie noting the government has the right to take up to a 30% interest.

The other issue is whether Harmony can afford its share of development costs for the project. As Macquarie points out, while this offers scope for Newcrest to end up with a larger share of the project, any move to increase its stake is likely to be conservative given a desire by Newcrest to be seen as an attractive partner for similar projects in the future.

While an accurate valuation for Wafi-Golpu remains difficult, brokers have attempted to give an idea of what the project may be worth. Macquarie is quite bullish and suggests a discounted cash flow valuation of $8-10 billion, though no value is currently incorporated into its model for Newcrest.

BA-ML also doesn't include the project in its valuation model, but estimates a potential value per Newcrest share of $5.00 after tax. This factors in an increase to capex assumptions for the development.

One question yet to be settled, notes BA-ML, is whether Newcrest proceeds first with the gold only Wafi deposit of the copper-gold Golpu deposit. Given the latest exceptional grades at Golpu this is now more likely to be the first development.

The other part of the analyst tour to attract comment was a visit to the Hidden Valley project, which has been experiencing some technical difficulties as production ramps up. This is likely to mean an increase in costs, but Macquarie expects any impact will be marginal.

On the plus side there remains scope for exploration to also increase resources at Hidden Valley, so offering potential to expand the life and/or size of the mine. Management has also indicated a goal of increasing annual throughout, so lifting production to around 280koz annually at minimal additional cost.

RBS Australia took the view the trend of improving production and costs at Hidden Valley would now be on hold for a quarter given current issues, but Newcrest does appear to have the upper hand in terms of sorting out any further problems.

RBS is a little more cautious on potential production expectations at Hidden Valley, forecasting a post de-bottlenecking rate of output of around 250koz annually. Management has indicated cash costs should settle at around $500-$550 per ounce, which is slightly below the broker's estimate.

Post the site visits broker ratings for Newcrest are unchanged, the FNArena database showing a total of seven Buys against a single Hold rating. The consensus price target according to the database is $46.44, which implies upside of around 15% from current levels.

Over the past year Newcrest shares have traded in a range of $29.73 to $43.71.

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