From a distance, all appears well at Australia’s largest gold miner, Newcrest Mining. The share price has doubled over the past year; the gold price is up, the AUD is down; all in sustaining cost – the industry’s standard measure of operating cost – has fallen to just US$760 an ounce ensuring record margins are being generated today.
Despite the rosy outlook, long term investors won’t be cheering. Newcrest stock is barely higher than it was a decade ago and is still half its peak of 2012. Higher gold prices have prevented disaster but this is hardly the best of times.
Today’s buoyant environment should not be wasted. Newcrest operates some excellent assets – Cadia is arguably the best gold mine in Australia while Wafi Golpu and Gosowong are fine assets.
Yet that quality is obscured by awful assets in its portfolio. Telfer, one of the largest gold mines in Australia, has generated persistently poor return on assets. Difficult geology, immense power consumption and remote location will always make it a hard mine to profit from.
That is even more true of Lihir. Sitting inside an active volcano on an island off PNG, Lihir is one of the largest gold mines in the world but has always generated lousy returns, typically around 2-4%.
Again, difficult geology and location mean Lihir will only ever make sense if it is massively expanded and unit costs reduced. Yet pouring billions of dollars into an asset that has already attracted some US$6bn of impairments isn’t tempting.
There is an excellent gold miner hidden within Newcrest but it is obscured by a few lousy assets. The solution is obvious: Newcrest should break up. It needs to sell its large and poor returning mines and concentrate on better quality assets.
Break ups are usually forced by crisis or competition which usually means poor asset prices are realised. That needn’t be the case today with even difficult mines generating decent margins. A smaller Newcrest would make a far better and resilient business. Shrinking is hard to do but the right answer is rarely the easy one.