Newcrest Still Chasing That Cash Flow

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

-More clarity on Lihir wanted
-Gearing needs to be addressed
-A lot hanging on better gold price
 

By Eva Brocklehurst

Brokers are not convinced that Australia's largest gold miner, Newcrest Mining ((NCM)), can overcome the odds and deliver positive free cash flow by the second half of FY14. The company's first half results were largely within expectations, given the recent detailed second quarter production report. Still, operating cash flow fell short of many forecasts and remains the pivotal point in assessing the outlook.

Deutsche Bank suspects that even with an unwinding of working capital, free cash flow will still be negative in the second half. This will weaken the balance sheet and make required debt refinancing and repayment that much more difficult. The broker concedes that using the existing longer term facilities to minimise the 2015 payments could make refinancing more manageable. Still, no free cash flow, a deteriorating balance sheet and weaker Australian dollar price assumptions do not add value to the stock, so Deutsche Bank maintains a Sell rating. The broker thinks that while the board may be comfortable with gearing in the short to medium term, the debt maturity profile is still a major issue.

The company's net debt increased in the first half, elevating gearing to 30.5%. The resource and reserve update showed higher costs prevail, hence the lifting of cut-off grades. This led to an 11% decrease in reserves, mainly at Telfer and Lihir. Gold price assumptions were unchanged at US$1250/oz. On the basis of these numbers, UBS suspects the company will want some help from the recently rising gold price to fulfill expectations. The broker's Neutral view is based on valuation. UBS thinks there is substantial leverage because of the company's high costs and gearing but remains concerned that the forecasts for Lihir beyond FY14 are opaque. As Lihir accounts for 37% of reserves and 35% of output the broker thinks the market deserves more clarity on this asset. UBS also believes the raising of fresh equity could ease balance sheet concerns.

BA-Merrill Lynch is concerned about the high debt levels and looming repayments, with around US$1.8 billion due by September 2015. On this broker's gold price estimates there is also a question over whether there will be enough cash flow to repay the debt, even with available facilities. To achieve positive cash flow Merrills estimates the gold price needs to rise to US$1400/oz at an Australian dollar exchange rate of US90c. Having said this, the broker expects the debt markets to remain open to Newcrest's requirements and the company is likely to roll the debt on attractive terms. Still, Merrills wonders whether the company wouldn't be wiser to fix the issue permanently. Raise some equity and calm the market's concerns over the debt levels, is the broker's prescription.

Newcrest is in a difficult situation, according to Citi. Staff and capex have already been much reduced and the broker thinks the management will need to contain or reduce gearing, despite being "comfortable" with current levels. Citi rates Newcrest a Sell, cautious about the growth profile and the substantial capex required to deliver growth in the future. While the broker acknowledges there are some large, low cost assets which provide stable gold and copper production, there are also marginal, high cost assets where the company badly needs a positive gold environment.

Macquarie also notes the gold price is key, finding the recent rally in the gold price a positive development. The other positive aspect, in the broker's view, is that gold production was at the top end of the guidance range for the half and the company expects costs will stay at the lower end of guidance. Despite this, Macquarie remains cautious regarding the company's ability to generate cash.

Morgan Stanley is concerned that the stock has had a strong run up since the start of the year and momentum may begin to ease, as the share price captures much of the operational turnaround. In terms of the fiscal position, the broker believes the company will need more debt in order to roll the amount due in September 2015. As the company recently stated it had no intention of making an equity placement, if protection from a lower Australian dollar gold price is required, the broker suggests buying put options as a preference.

Credit Suisse found no great surprises in the result. The reserve and resource re-statement was more benign than the broker had expected, leading to reduced impairments compared to what may have been the case if adjustments were more significant. This broker is assured by management's relaxed outlook, suggesting a progressive reduction in gearing over time is in hand. This will be helped, in the broker's view, by the increase to free cash that will come after next year when the annual capital investment in Cadia East falls to $100m from $400m. JP Morgan also found the first half lacked surprises and remains content to retain an Overweight rating. Cash flow was soft but the broker thinks the outlook is improving as the company moves to reduced gearing and one-off tax and working capital payments roll off.

There are two Buy ratings, three Hold and three Sell on the FNArena database. The consensus price target of $10.41 suggests 9.3% downside to the last share price and compares with $10.14 ahead of the results. 
 

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