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Good as gold, except for the share price

Leading gold producer Newcrest Mining (ASX:NCM) reports its profit for the June year today and there will be no surprise if it weighs in with a result that tops the $1 billion mark.

Leading gold producer Newcrest Mining (ASX:NCM) reports its profit for the June year today and there will be no surprise if it weighs in with a result that tops the $1 billion mark.

Broker forecasts for the group's full-year result range from a low of $892 million to $1210 million, with a median forecast of $1050 million. It is the sort of stuff you would expect for a group drawing the benefits of bumper gold prices on annual production of 2.7 million ounces of the yellow stuff.

But all that hasn't amounted to much in terms of Newcrest's share-price performance. The group's share price is pretty much where it started (calendar) 2011, notwithstanding the 26 per cent rise in gold prices in the same period.

Newcrest is not alone in the gold sector in having its share price disconnect with the rapid rise in gold prices. It's as if equity investors are treating gold stocks like any other equity class in periods of market turmoil, notwithstanding their leverage to higher metal prices.

Having said that, gold has retreated from its record high of more than $US1800 an ounce. But at Friday's close of $US1746 an ounce it is still none too shabby. In a way, it is a pity that Newcrest reports its annual profit today and not in three or six months.

That's because there is nothing in the latest June year result for gold's $US300-an-ounce increase - at a lower exchange rate, too - in the past six weeks or so.

It is a point picked up by RBC Capital Markets in a research note on Newcrest last week. Based on previous Newcrest guidance on its sensitivity to gold price moves, the broker said that gold's six-week run equates to an annualised uplift to net profit of some $650 million.

Taking it further, if you were to pencil in $US1800 gold (and $US4-a-pound copper and a $US1.02 exchange rate), Newcrest's profit next year would come in at something like $1.96 billion and $2.4 billion in 2013.

The disconnect between Newcrest's share-price performance and its earnings surge would have to be addressed under that scenario. But there is no guarantee that near $US1800-an-ounce gold will continue, even if the likes of Deutsche Bank reckon it has got $US2000 an ounce written all over it.

For well-known historical reasons, the Germans know a thing or two about the value of gold compared with other asset classes. So it was interesting to hear Deutsche Bank say the gold price would need to rise to $US2960 an ounce for it to return to relative levels with the S&P500 last seen in the 1930s.

"For the time being this is not the economic scenario that we are forecasting, but events in recent days have certainly moved us closer to this outcome," the bank said last week.

SMALLER FRY

Regular readers of Garimpeiro will know that a top-end-of-town stock such as Newcrest is not his normal stomping ground. But take it as a long way round to pointing out that the surge in gold prices is having an amazing impact on the leverage to the upside of junior companies with near-term development projects.

Cerro Resources (ASX:CJO) is a case in point. It's got a deep portfolio of projects, the most advanced of which is the 66 per cent-owned Cerro del Gallo gold/silver project in Mexico.

Plug in a $US1157-an-ounce gold price and a $US19.81-an-ounce silver price and you're looking at a life-of-mine net cash flow (undiscounted and before tax) of $US516 million. But plug in $US1700 gold and $US35 silver and it balloons to a staggering $US1.28 billion, based on an initial two-stage mine life of 14.3 years and average annual production of 90,800 ounces (gold equivalent).

But what has Cerro Resources's share price done since the run in gold and silver prices transformed the scale of potential returns from Cerro del Gallo?

It has actually gone backwards, from 25? a share in late July to its 18? a share at close on Friday.

At that price, it is being valued by the market at $134 million against which it is holding cash of $18 million. The company is working on financing the project before construction starts next year.


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