Newcrest Mining
JMP Markets – Market Alert
February 24, 2021
Recently Newcrest Mining Limited (NCM) announced their half yearly results to 31 December 2020. The JMP team share their perspective following the announcement from Newcrest Mining (NCM)
Newcrest Mining Limited has put together a strong set of numbers for the first half of its 2021 financial year.
Clearly the significant increases in both gold (+25%) and copper (+17%) prices when compared to the same period in the previous financial year were major contributing factors in the company achieving a US$553 million underlying profit for the 6-months to December 2020. Newcrest uses the Australian 30 June financial year end.
Strong gold prices will always have a positive impact on both Newcrest’s financial performance and its stock price. However, it is worth noting that several of its projects also produce considerable amounts of copper. The forecast production for the full 2021 financial year is around 2 million ounces of gold and around 145,000 tonnes of copper. As such, the stock is not an unadulterated barometer for gold prices.
Whilst the share price of Newcrest is to a considerable extent geared towards gold prices and to a lesser extent impacted by copper prices, it is also important to understand that the Newcrest portfolio of assets contains a mix of projects at various stages of maturity and potential.
Consequently, perhaps the key ingredient determining the success or otherwise of the company – as evidenced in profits and share prices over time – is its management team’s ability to sweat the existing assets and bring new projects into production or expansions. In this respect, Newcrest has an admirable track record and strong market confidence. Based on the latest 6-monthly performance, we consider that confidence to be justified.
We find it particularly pleasing that Newcrest has decided to reward its patient shareholders with a significant increase in its interim dividends (from US7.5 cents per share to US15 cents). This increase was accompanied by a change in the company’s dividend policy to target a 30-60% payout ratio – with a stated floor of US15 cents per share.
Dividend payout has been one of the indicators in respect of which Newcrest has thus far underperformed its peers and we are pleased that the company is taking steps towards becoming best-in-class in this area of great importance to investors.
From a Papua New Guinean perspective, the performance of Lihir during the period was pleasing.
Gold production increased from 177koz in the September quarter to more than 200koz in the December quarter.
Lihir contributed US$180 million towards aggregate free cash flows for the period which makes it the second largest contributor after the invincible Candia project in New South Wales (US$560 million).
All In Sustaining Costs (AISC) at Lihir continues to be high at US$1,352 per ounce and this is likely to remain a challenge in the coming years. This left a sustainable cash flow margin of US$474 per ounce during the 6 months to 31 December 2020.
The 6-monthly report was noticeable bullish in terms of the future performance of Lihir, with management foreshadowing >1moz per annum production levels for more than a decade from around 2023. This will further cement Lahir’s status as a world class gold mine and a core part of the Newcrest portfolio. Production guidance for Lihir for the balance of the 2021 financial year was maintained at between 720-820koz with a 770koz mid-point.
For those in Papua New Guinea who have in the past raised legitimate questions in relation to the amounts of corporate income tax paid by Newcrest in PNG, it is important to understand the relatively high cost nature of the Lihir operations – as reflected in the high AISC figures.
The aggregate tax payable position of Newcrest/Lihir in Papua New Guinea is also impacted by the charging of US$363 per ounce in depreciation and amortisation during the first 6 months. This reflects the considerable investments in the asset base of the mine in the current and previous years.
Whilst it is not specifically disclosed, we estimate the December 2020 half-year accounting profit per ounce of gold sold from Lihir to be around pre-tax US$265 per ounce.
The overall tax payable position of Lihir will then be impacted by the extent to which its high AISC and depreciation charges have in the past resulted in accumulated losses. It is to be hoped that continued improvements in production levels and cost management, combined with elevated long term gold prices, will ensure that Lihir over time makes meaningful contributions as a corporate income tax payer as well as to its shareholders and other stakeholders.
It is also important to bear in mind that buried within the financial reports of Newcrest are the costs (and corresponding benefits) associated with a full time equivalent Lihir workforce of more than 2000 people as well as millions in local purchases within Papua New Guinea and more than US$17 million in royalties and levies.”
Chris Hagan
Head, Fixed Interest and Superannuation
JMP Securities
Level 1, Harbourside West, Stanley Esplanade
Port Moresby, Papua New Guinea
Mobile (PNG): +675 72319913
Mobile (Int): +61 414529814