Newcrest builds war chest with $1b bond issue

INVESTORS have been left to ponder the merger and acquisition ambitions of Newcrest's new managing director, Greg Robinson, after the leading gold company said it would pull in $US1 billion from a long-term bond issue.

By InvestSMART · 9 Nov 2011

By InvestSMART ·
9 Nov 2011

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That was because the lightly geared Newcrest does not need the funds, even if it is planning to spend as much as $9 billion in the next five years increasing its gold production by 50 per cent to 4 million ounces from existing "in-house" growth opportunities.

Newcrest is spending $2.2 billion on its Cadia East project in NSW and $700 million on the expansion of the Lihir mine in Papua New Guinea. Those projects provide most of the planned growth in the next five years.

Beyond that, the half-owned Wafi-Golpu project in PNG is being banked on to underwrite a major push beyond 4 million ounces of gold annually. South Africa's Harmony owns the other half of Wafi-Golpu and the market suspects Newcrest wants to make the project all its own.

Newcrest's heavy capital expenditure program is expected to be funded by operating cashflow thanks to bumper gold prices and strong prices for the group's byproduct production of copper.

Newcrest's statement to the ASX said the bond issue would be used to repay existing unsecured debts as well as fund a "portion of Newcrest's major growth projects".

Mr Robinson was quoted as saying Newcrest had simply taken advantage of its ability to raise some "very competitive long-term capital", which would "further diversify Newcrest's sources of funding". Newcrest also has a $US2 billion shorter-term debt facility with its eight relationship banks.

Short of Newcrest following up its successful takeover of Lihir Gold with another acquisition, analysts said the bond issue would heighten Newcrest's ability to increase dividend payments and accelerate development projects - all while maintaining a preferred ceiling on its gearing levels of 15 per cent.

Mr Robinson was forced to defend Newcrest's dividend record last month after criticism on gold company payouts by its biggest shareholder and the world's biggest mining fund manager, BlackRock.

BlackRock had earlier argued that the low payout ratios by gold producers was one of the reasons gold stocks had lagged behind the surge in gold prices.

Mr Robinson said Newcrest was already at the higher end of dividend payers in the gold sector. "We are roughly at a 1.5 per cent yield with that normal [30? a share] and special dividend [20? a share] that we paid - and that would be in among the top in the gold industry," Mr Robinson said last month.

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Frequently Asked Questions about this Article…

What was Newcrest's US$1 billion bond issue and why did the company raise it?

Newcrest issued a long-term US$1 billion bond to take advantage of competitive long-term capital markets. The company said the funds would repay existing unsecured debt and finance a portion of its major growth projects, while further diversifying its sources of funding.

Does Newcrest actually need the bond proceeds for day-to-day operations?

According to the article, Newcrest is lightly geared and does not strictly need the funds for day-to-day operations. Management said the bond was raised because the company could secure very competitive long-term capital and to diversify its funding, not because of an immediate cash shortfall.

Which growth projects will Newcrest fund with the bond proceeds and planned capital spending?

Most near-term growth spending is earmarked for Cadia East in New South Wales (about US$2.2 billion) and an expansion of the Lihir mine in Papua New Guinea (about US$700 million). The company also plans expansion beyond these projects and is banking on the half-owned Wafi-Golpu project in PNG for major future growth.

How will Newcrest pay for its heavy capital expenditure program overall?

Newcrest expects to fund much of its heavy capex from operating cash flow, helped by strong gold prices and good prices for its copper byproduct. The bond and an existing US$2 billion short-term debt facility with eight banks provide additional financing flexibility.

Could the bond issue affect Newcrest's dividend policy or payouts to investors?

Analysts quoted in the article said the bond could increase Newcrest's ability to raise dividend payments and accelerate development projects while maintaining its preferred gearing ceiling. Management has defended the company's dividend record, noting Newcrest's yield is roughly 1.5% including recent normal and special dividends.

What does the bond issue mean for Newcrest's gearing and balance sheet targets?

Newcrest has a preferred gearing ceiling of around 15%. The article says the bond issue was structured to diversify funding and could allow the company to pursue growth and dividends while keeping gearing around that target.

Is Newcrest likely to pursue more acquisitions after its takeover of Lihir Gold?

The article notes market speculation that Newcrest may want to own the other half of the Wafi-Golpu project (currently partly owned by South Africa's Harmony). Analysts said the bond could support acquisition ability, but the article does not confirm any specific new takeover plans.

How did investors and big shareholders react to Newcrest's dividend record mentioned in the article?

Newcrest's dividend policy faced criticism from its biggest shareholder and BlackRock, which argued low payout ratios had held gold stocks back. Management responded by defending Newcrest's dividend position, saying the company is among the higher-yielding payers in the gold sector based on recent normal and special dividends.