MARKETS SPECTATOR: Newcrest's painful numbers

Poor Newcrest. The stock dropped 33.5 cents, or 2 per cent, to $16.675 at 1303 AEST after the company’s quarterly production report was released this morning. The stock’s slide is not surprising. Last month the company cut its gold production forecast for the 12 months to June 30, 2013 to 2-2.15 million ounces, from 2.3-2.5 million ounces.

The company has not helped its cause with the fact that this was the fourth production forecasts downgrade in the last few years. This month Newcrest had to deal with the fallout of the biggest two-day fall in the price of gold for 33 years. That has damaged sentiment toward gold stocks and contributed to Newcrest’s 39 per cent negative return over the last 12 months.

A longer-term headache for Newcrest is its cost of production. In the three months to March 31, Newcrest said its quarterly cash cost was $799 an ounce and its gross cash margin was $785 an ounce. Newcrest’s costs of production and margins are middle of the range, “not awful,” says one analyst, compared to global peers. But Newcrest and other Australian miners are at a cost disadvantage. Their costs of production are grossly high compared to their global rivals. Workers at mines in Australia are paid between $160,000 and $180,000 annually with accommodation, meals and transport to and from their homes to the mines free. In contrast, South African and even Canadian and US gold producers have far lower labour costs.

The strength of the Australian dollar is also hurting Newcrest. As the company puts it, “the recent decline in commodity prices has not been accompanied by a reduction in the strength of the Australian dollar and Papua New Guinean Kina.” Newcrest says it is reviewing all its businesses, particularly related to higher cost and future production, part of a studied effort to appeal to the investors to not lose faith in the stock. But the modern investor is a global one. Investor dollars are likely to go to Newcrest’s rivals such as Barrick Gold Corp or Newmont Mining Corp. If the gold price slips further, investor sentiment toward Newcrest is likely to sour even more.