Newcrest set to strip $6b off value of mines
Australia's biggest listed gold producer confirmed it would close its Brisbane office, cut its 2014 capital spending by a third and almost halve its spending on exploration, as it tries to adjust to a lower gold price.
Announcement of the restructure exacerbated a week of share price falls, with $2.6 billion being wiped off the value of the company since the rot began on Tuesday morning.
The looming write-down prompted ratings agency Moody's to place Newcrest's credit rating on review for a possible downgrade. Any substantial downgrade could see Newcrest's current Baa rating move into junk territory.
The exact size of the impairment will be confirmed in August, and the company said the pain would be spread across Newcrest's six mines.
But an estimated $3.6 billion of the impairment will relate to goodwill on the troublesome Lihir mine in Papua New Guinea, which the company bought for about $10 billion in 2010.
That price now outstrips Newcrest's market capitalisation, and the purchase increasingly appears to be an expensive blunder, given the production downgrades Lihir has caused over recent years.
Kimber capital broker Kim Slater even likened the Lihir purchase and its impact on the Newcrest share price to Rio Tinto's disastrous $38 billion Alcan acquisition, which was central to the sacking of Rio boss Tom Albanese.
"From its peak $40 share price the board has presided over a $20 billion loss in market value," he wrote. "That destruction of shareholder value is only eclipsed by Rio's Alcan write-downs since the GFC. And heads rolled over that."
Newcrest chief Greg Robinson was not in charge when Lihir was purchased, but some members of the board were.
Staff numbers at Newcrest will be cut hard and fast. Mr Robinson said between $50 million and $75 million worth of redundancies would be processed and completed within the next 23 days. About 100 further job cuts are expected to join the 150 jobs cut earlier this year.
Rather than being an aggressive growth stock, Newcrest will now cease production of high-cost gold, and instead focus on maximising cash flow.
Gold production in 2014 is now forecast to be a maximum of 2.3 million ounces, almost exactly the amount produced in 2012, despite billions being spent on expansions and upgrades.
Friday's changes almost certainly disrupt Newcrest's cherished five-year plan to produce 3.5 million ounces of gold by 2017. But Mr Robinson stressed that the company was retaining the assets, and could revive them should the market conditions suddenly rebound.
As if the restructuring were not dramatic enough, the 15 per cent slump in Newcrest shares over the 72 hours before the announcement created its own sideshow.
Bell Potter director Charlie Aitken told clients that the slump should be "fully investigated" by the Australian Securities and Investments Commission.
"I believe any mum-and-dad investor who bought [Newcrest] shares in the last two days has grounds for genuine concerns," he said. The comments were echoed by other brokers, and an ASIC spokesman said the issue had not escaped its attention.
"We are aware of the trading and we are in discussions with ASX regarding the price move, which is in accordance with our usual procedures where there have been large moves in share prices," he said.
A Newcrest spokeswoman defended the company against the allegation, saying there had been no selective briefings for analysts.
She said the analyst reports during the week were similar in theme to what Newcrest foreshadowed in its April results announcements, and to what Mr Robinson said during a recent conference speech in Barcelona.
WEDNESDAY
Analyst reports either downgrade Newcrest or question the outlook for the stock
Newcrest shares dive 80¢ to $14.35.
THURSDAY
The company comes under pressure to respond to the share price slump
Newcrest shares drop 99¢ to $13.36
After market close, BusinessDay reports that Newcrest is poised to cut jobs and close its Brisbane office.
FRIDAY
The company announces it will scrap its dividend, cut jobs, shut Brisbane and write down up to $6 billion in assets
Its shares close $1.01 down to $12.35
Frequently Asked Questions about this Article…
Newcrest said it expects to write down up to $6 billion of mine value as part of a major restructure. The move accompanies cutting jobs, closing its Brisbane office, scrapping the dividend for at least a year and trimming capital and exploration spending to adjust to a lower gold price.
The impairment reflects the company revaluing assets in a weaker gold-price environment and will be spread across Newcrest’s six mines. The company estimated about $3.6 billion of the charge will relate to goodwill on the Lihir mine, which Newcrest bought for roughly $10 billion in 2010.
Newcrest said it will scrap its dividend (cutting payouts for at least a year), reduce 2014 capital spending by about one third and almost halve its exploration budget as part of its shift to preserve cash.
The company will close its Brisbane office and process redundancies estimated at $50–$75 million within the next 2–3 days. About 100 further job cuts were expected to add to the 150 roles already cut earlier in the year.
Ratings agency Moody’s put Newcrest’s credit rating on review for a possible downgrade after the looming write-down. The company’s current Baa rating could fall further if the impairment is substantial, which would raise concerns about a move toward non‑investment grade.
Newcrest said it will stop producing high‑cost gold and focus on maximising cash flow rather than aggressive growth. Gold production for 2014 is now forecast at a maximum of 2.3 million ounces, and the firm said the changes will almost certainly disrupt its five‑year plan to reach 3.5 million ounces by 2017, though it is retaining assets to revive if conditions improve.
Shares fell sharply in the days before and after the announcement — a roughly 15% slump over 72 hours was reported, with specific daily falls (for example to $14.35 and $13.36) culminating in a close at $12.35 on Friday. Brokers flagged the volatility and ASIC said it was aware of the trading; ASX and regulators were in discussions while Newcrest denied any selective analyst briefings.
Newcrest said the exact impairment figure will be confirmed in August and that the pain will be spread across its six mines, with a significant portion tied to goodwill on the Lihir operation.
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