Lihir Aside, Solid Outlook For Newcrest Mining

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

Lihir remains the black sheep among Newcrest Mining's gold production assets but grades are still expected to pick up later in the current decade.

-Lihir still anticipated reaching 1mozpa
-More confidence in the sustainability of Telfer
-A superior resource base provides long-term opportunities
 

By Eva Brocklehurst

A robust gold price sustained Newcrest Mining ((NCM)) in FY20 along with a rebound in copper prices, which helped mitigate some lacklustre production numbers. Again, Lihir (PNG) was the black sheep.

Production at Lihir is still being hampered by unexpected lower grades and reduced mill recovery, and guidance for FY21 is weaker than most brokers expected. Guidance is for 720-820,000 ounces, which is in line with FY20 production.

Lihir is still being affected by clay in the mining sequence and overshadowed what was a healthy FY20 result, in Ord Minnett's view. The broker reduces production forecasts for FY21 and FY22 by -11% and -8% respectively, based on the lower and delayed grades at Lihir.

Grade should pick up significantly later this decade, the broker notes, when that elusive production rate of 1mozpa is expected. A seepage barrier feasibility study is due at the end of FY21, which may provide room for some further optimisation, although Ord Minnett suspects capital expenditure will be required.

Citi also looks forward to the grade lifting later in the mine life, i.e. to 2.9-3.0g/t in FY27-29. Morgans is not so sure and questions whether there will ever be a consistent performance at Lihir, or whether Newcrest will achieve 80% mill recovery.

Lihir has always been a difficult asset and, nevertheless, UBS points out the company has a number of alternatives.

Havieron/Red Chris

Turning to Havieron (WA) Ord Minnett notes the more drilling, the bigger the project gets, suspecting that, in time, a larger scale bulk mining project may supersede selective mining in its modelling. The focus is now on continued drilling, a scoping study and a decline commencement.

A pre-feasibility study is due in September 2021 for Red Chris (Canada) and the definition of other high-grade pods leads Ord Minnett to suspect its current modelling may be conservative.

UBS agrees the next 12 months should produce positive catalysts for Havieron and Red Chris, including a maiden resource at the former by December 2020. The broker is also pleased management has more confidence in the sustainability of Telfer (WA) as a 400,000 ounces per annum asset for the near-term and prior to the introduction of Havieron ore.

A caving trial at Telfer has been completed with demonstrable success, Morgan Stanley notes, and this will also continue at Cadia (NSW) in FY21. Cadia's large maintenance outage, the SAG mill replacement, has been postponed, previously due in FY21 and now pushed out into FY22.

Ord Minnett is pleased with this news, which means its Cadia model is largely unchanged. Cadia is expected to produce 680-760,000 ounces in FY21. Fruta del Norte (Ecuador) has recently come back online after shutdown because of the pandemic, and Newcrest expects its share of production for FY21 to be 95-110,000 ounces.

While disappointed with Lihir, Macquarie was pleased with the operating earnings outcome in FY20 and Newcrest also delivered a surprise final dividend of US17.5c. Credit Suisse was also impressed with FY20, given the acquisitions made during the year and, taking a longer term view, finds much to like in the stock as there is a superior resource base and plenty of organic growth opportunities.

While realising growth is a long-dated proposition and there is material development/execution risk on the way, the broker highlights the fact Newcrest has proven to be reliable, with development and operations capability as well as a social licence to operate at Lihir.

If Newcrest can manage the risks around Lihir's performance and the life extension at Telfer this could open up value, Morgans concedes, and notes the main downside risk would be volatility in the gold price or a poor performance at Cadia.

FNArena's database has two Buy ratings, four Hold and one Sell (Macquarie). The consensus target is $34.81, suggesting 2.8% upside to the last share price. Targets range from $28.00 (Macquarie) to $38.50 (UBS).

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms