Newcrest's record loss doesn't clear the decks

Massive write-downs and a record loss. But without radical surgery, Newcrest's earnings future remains under a cloud.

Newcrest has entered rarefied territory, notching up one of the biggest losses in Australian history.

At $5.78 billion, the result was smashed by a $6.23 billion impairment charge that eclipsed even the blowout in charges announced by the company just a few days ago.

There are analysts who reckon all the bad news is now priced in to Newcrest (NCM) given its share price now has fallen 53% in the past year. Even if that is the case, company now has become a risky punt on the price of gold. And the odds are not looking flash.

On its own admission, Newcrest is banking on a medium term gold price of $US1,450. It is managing its operation and its cash flow forecasts on that price arguing all its operations will be either cash flow neutral or positive at that price.

A cursory look at the bullion price graph suggests that, at US$1,328, the price has some way to go before hitting that kind of level.

And with global inflation and growth at anaemic levels – despite the fears generated by the unprecedented injection of cash into the US, Japanese and European economies – it could be quite some time before there is a significant shift north of that level.

The real concern for Newcrest is cost. For every ounce of gold it digs out at its Hidden Valley operations, it is losing serious cash. The company spends $A1,246 an ounce to retrieve an ounce of yellow metal from Telfer and $A1,740 at Hidden Valley.

This morning’s astounding loss announcement, while widely expected, provided a dearth of information on how Newcrest will address this. While there have been layoffs and cost-cutting at Telfer, little has been revealed about Hidden Valley.

Both those operations are undermining low-cost assets like Lihir, ironically an asset for which Newcrest paid far too much in its takeover and which constituted a large slice of the impairments and write-downs.

Gearing also remains a problem at 29.1%, and while the company has a laudable intention of reducing that to 15%, exactly how that will be achieved in the near term is difficult to determine.

The punters didn’t seem to care too much this morning, pushing Newcrest shares 5% higher in early trading.  But with the losses now on the table, the surge probably is more closely related to the jump in bullion prices since Friday (see Tim Treadgold's article on gold, Losing its lustre?).