Will Red Chris Add Value To Newcrest?

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Brokers perceive Newcrest could add significant value to the Red Chris copper-gold project, in which it has acquired a 70% stake.

-Natural fit for Newcrest as few miners have its expertise in block caving
-Opportunity for improvement also lies with better metal recoveries
-Is this an opportunistic sideshow?
 

By Eva Brocklehurst

Newcrest Mining ((NCM)) has opened up a sizeable opportunity via a copper-gold mine in Canada, acquiring a 70% stake in Red Chris for US$806.5m, a potential tier-1 mine. A tier-1 mine is defined as over 300,000 ounces per annum, with costs of less than US$800/oz and a life of at least 15 years.

It is clear that Red Chris is not yet in this position, but Newcrest is confident it can add value through optimising the current open pit, which is underperforming, and expediting the transition to block caving.

Brokers believe the mine is a natural fit for Newcrest, as few miners, globally, have its expertise in block caving. Moreover, Morgan Stanley points out the company's coarse ore processing technology could help improve recoveries, which are considered sub-optimal.

UBS notes the sale process was a competitive one and other buyers may have envisaged the potential in optimising the open pit, although the real driver of long-term value will occur if a block cave is developed. This is where Newcrest has the ability to affect a change in the value of the asset which others may not been willing, or able, to do.

Based on the company's assessment of what constitutes a tier-1 asset, and given the low grade of Red Chris, UBS asserts Newcrest will need to significantly expand the size of the mine. Shaw and Partners, not one of the eight stockbrokers monitored on the FNArena database, likes the acquisition and believes the value of the project should improve markedly over time.

Productivity Enhancements?

UBS estimates a lift in productivity and recoveries could raise open pit output to 36,000tpa from 27,000tpa and cut costs to around US$1.50-1.60/lb. Productivity enhancements and the company's global supply chain sourcing may also add value.

Newcrest proposes a two-stage plan for Red Chris. Firstly, plant and mine optimisation will be implemented and supply chain costs reduced, which should deliver near-term value.

A clear opportunity for improvement lies with better recoveries, which have average 75% for copper and 45% for gold. Over time, the resource will offer more gold at depth and UBS estimates the mine can shift from the current 80:20 copper:gold split towards a block cave resource split of around 0.55:0.45 copper:gold.

Another opportunity, Macquarie assesses, is likely to be in scheduling, particularly when a move to block caving is factored in. Macquarie notes copper is the dominant metal at the mine and, given the high co-product credits, assesses that Red Chris will be able to achieve Newcrest targeted cost position.

However, assuming just the high-grade portion of the resource results in a mine life of just six years. Hence, either exploration success in the form of additional high-grade, or mining of a global grade inventory, is required.

Citi suspects that Newcrest is less interested in the Red Chris pit and more in the large-scale porphyry resource that is attached to the project. Admittedly grades are low. The broker expects the company will start building the cave before open pit strip ratios in the current plan increase to more than 2:1 in 2023, both to save on mining waste and maximise the amount of the orebody available to the cave.

As a useful comparison, Citi notes the Cadia East block cave took Newcrest $2.66bn and the better part of three years to build. Building the same thing today could cost, roughly, US$1bn per 10mt at Red Chris. Shaw and Partners asserts, if the value trajectory of Cadia is any guide, Red Chris could turn out to be a suitable tier-1 asset. The broker has a Buy rating and $25.50 target.

Long-dated Option?

This would be Newcrest's fifth tier-1 exposure, after Cadia, Wafi Golpu, Lihir and Fruite Del Norte and would meet its target of having five by 2020. However, Macquarie believes this is an opportunistic sideshow, and the real prize for Newcrest is the Newmont Australia business, which has been earmarked for divestment.

Furthermore, acquiring Red Chris does not hamper the company's capacity to bid for the Newmont assets. The broker acknowledges the company's belief that this is a tier-1 geology and the large deposit is amenable to block caving, but asserts it is just another long-dated development option.

FNArena's database shows one Buy rating (Citi), three Hold and four Sell. The consensus target is $23.56, signalling -5.2% downside to the last share price. Targets range from $20.30 (Credit Suisse, yet to comment on the acquisition) to $29.00 (Citi).

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