MARKETS SPECTATOR: Newcrest knockdown

Citigroup has downgraded the outlook for Australia's biggest gold miner, Newcrest, as the company pivots away from production growth.

Newcrest Mining shares today hit a 52-week low of $13.53. The stock of Australia’s biggest gold miner has slumped 39 per cent in the last 12 months. Citigroup analyst Daniel Seeney is pouring more salt in the wound by rating the stock a 'sell' and predicting its price will fall to $13.

Newcrest has three profitable and three unprofitable mines, according to Citigroup. Unprofitable mines represents 40 per cent of financial year production this year. Seeney estimates $1.5 billion of Newcrest’s free cash flow has evaporated in seven months because of a decline in the gold price and increasing costs.

“We don’t regard NCM’s financial position as pressured, but believe that management will be looking to avoid stretching gearing far beyond the established target (of 15 per cent of net debt-to-assets) for any extended period of time,” says Seeney.

Seeney forecasts Newcrest’s earnings per share will contract 54 per cent in the 12 months to June 30 – to 65.7 cents. The company’s net profit will fall by more than half to an estimated $503.6 million in 2013 from $1.089 billion in 2012, according to the Citi analyst.   

“Recent presentations have outlined a major change in strategy underway at Newcrest, with the focus shifting to returns and cash generation at the expense of production growth,” says Seeney. “This has come in response to investor demand, but also the more benign outlook for gold prices which calls into question further discretionary capex.”

Citigroup forecasts the gold price will be $US1505 an ounce in the last six months of 2013. In 2014 gold will drop to $US1434 an ounce, it says.

At 1114 AEST Newcrest’s shares had fallen 71 cents, or 5 per cent, to $13.64. The benchmark S&P/ASX200 Index had dropped 41.306, or 0.9 per cent, to 4793.90.

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