Australia | Jul 27 2012
– Newcrest production report broadly as expected
– A lack of negative surprises well received
– New project delivery offers scope for a re-rating
– All brokers in FNArena database now rate Newcrest a Buy
By Chris Shaw
Newcrest ((NCM)) delivered a solid June quarter production report, output of 587,000 ounces coming in comfortably ahead of March quarter production of 532,000 ounces. Driving the increase was better output from the key Cadia, Lihir and Gosowong projects, which were enough to offset a slight fall at Telfer. Costs were flat in quarter-on-quarter terms at $604 per ounce.
The result was broadly in line with what most in the market had been expecting, as Deutsche Bank for example had been forecasting production of 585,000 ounces at a cost of $609 per ounce and JP Morgan output of 591,000 ounces at a cost of $641 per ounce.
Given production broadly matched estimates, brokers in the market have made relatively modest changes to earnings forecasts. UBS has lifted its earnings per share (EPS) forecasts by 5-13% through FY14 to account for lower cost assumptions, while JP Morgan's forecasts have in general moved lower to reflect changes to commodity price and foreign exchange assumptions.
Consensus EPS forecasts for Newcrest according to the FNArena database now stand at 138.2c this year, rising to 166c in FY13.
The highlight of the quarterly for Citi was the lack of any negative surprise, as it is the first quarter without such a surprise for some time. With the result now factored in, Citi expects the market's focus will turn to upcoming full year results and any update on production guidance in coming years.
Citi notes existing guidance, which is stale given operational issues in recent quarters, is for 3.5-3.7 million ounces of gold being produced in 2015. Citi expects a revision to guidance to 3.0-3.2 million ounces in 2015, while the broker's forecast stands at 2.9 million ounces.
Deutsche Bank has similarly adjusted its production expectations in coming years, forecasting output will grow from nearly 2.4 million ounces in FY13 to 3.3 million ounces by FY16. This implies capitalised annual growth in gold production of 9% for FY12-FY16. Assuming the Cadia Valley East and Lihir ramp-ups progress seamlessly, Deutsche sees scope for a re-rating for Newcrest.
The lack of any negative news from both projects in the June quarter suggests solid progress at both projects is continuing, with Lihir MOPU expects to ramp up production in the coming half-year and Cadia Valley expected to deliver first commercial production in the December quarter. Higher capital costs at Cadia Valley have been factored into broker models.
UBS agrees a re-rating for Newcrest is possible, but cautions this will require delivery of current projects. At the same time UBS suggests value in Newcrest has improved following recent share price weakness, so rating is upgraded to a Buy from Neutral.
Citi also rates Newcrest as a Buy, though the broker argues the stock remains more expensive in earnings multiple terms than major North American producers such as Newmont and Barrick. Given this implies a lack of significant interest in Newcrest from offshore investors, Citi prefers smaller growth vehicles such as Regis Resources ((RRL)) and Beadell Resources ((BDR)) among Australian gold plays.
The upgrade by UBS means Newcrest is now rated as a Buy by all eight brokers in the FNArena database. The consensus price target stands at $31.76, down from $32.58 previously, with targets ranging from Deutsche at $28.05 to JP Morgan at $39.00.
FNArena is yet to receive update reports from BA-Merrill Lynch and Credit Suisse.
JP Morgan sees its target as justified given it represents a multiple of 1.7 times on the operational portion of the broker's revised valuation. This is in-line with long-term trading multiples for major Australian gold companies.
Shares in Newcrest today are higher, trading up 75c at $23.12 as at 10.50am. This compares to a range over the past year of $20.89 to $41.27. The current share price implies upside of a little more than 40% relative to the consensus price target in the FNArena database.
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