Australia | Aug 16 2011
– Newcrest's earnings meet expectations
– Guidance less positive, capex to remain high
– Future growth needs to be de-risked
– Two downgrades post the profit result
By Chris Shaw
Consensus market forecasts for full year earnings from gold producer Newcrest ((NCM)) were for a result of a little more than $1 billion and the $1.058 billion result met expectations from the perspective of headline numbers.
What didn't meet expectations according to UBS was the guidance offered with the result, as this has caused cuts to gold production estimates for both FY12 and FY13 and an increase in capex expectations over the next five years.
Newcrest is now planning to spend around $9 billion on capex over the next five years to deliver growth from new projects, a level Deutsche Bank suggests is relatively capital intensive given the growth expected.
As well, Deutsche notes the next phase of growth for Newcrest comes with increased technical risk from the likes of Cadia Valley East and Lihir MOPU as well as increased jurisdictional risk of potential delays to projects in both Papua New Guinea and Fiji.
Given the increase in capex expectations, BA Merrill Lynch suggests FY11 was not the catalyst for Newcrest that had been expected, but offsetting this is future production growth remains among the best in the world.
A number of Newcrest's growth projects are still in the pre-feasibility study phase and so are not included in BA-ML's base case estimates but do offer some upside risk longer-term. JP Morgan agrees, noting the impending listing on the Toronto Stock Exchange and a positive macro backdrop for gold also imply some upside potential.
This positive view sees both BA-ML and JP Morgan retain Buy ratings on Newcrest, while both Deutsche Bank and UBS have downgraded to Hold from Buy recommendations. As Deutsche notes, Newcrest is currently not so cheap relative to peers given the de-risking of future growth now required.
RBS Australia agrees, suggesting given the details provided in the result Newcrest is now trading around fair value. This means no change to RBS's Hold rating, though the broker does see potential for increases to valuations assuming the gold price stays above current consensus estimates of around US$1,530 per ounce for FY12.
While a comparison of five-year production charts from 2010 and 2011 shows a significant increase in targeted gold production, RBS notes there has been a 12-month deferral of the copper production profile.
Overall RBS sees the growth profile of Newcrest as still strong, while suggesting some near-term wins are needed to reassert the operational and development record before the market ascribes more value to the production profile.
The FNArena database shows Newcrest is now rated as Buy four times and Hold three times, the closest split in recommendations on the stock for some time. The consensus price target according to the database is $44.13, which implies upside of around 14% from current levels. Goldman Sachs, which is not part of the FNArena stockbrokers universe, also downgraded to Hold today, with a price target of $48, but on the back of sharply reduced EPS estimates for the years ahead.
Shares in Newcrest today are weaker and as at 1.45pm the stock was down $1.85 or 4.6% at $38.55. This compares to a trading range over the past year of $34.78 to $43.71.
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