Newcrest Mining’s response to the ASX query over a series of suspiciously-timed broker downgrades just ahead of last week’s updates on the gold miner’s review of its business that triggered a dramatic sell-off in its shares leaves hanging a critical question.
Was it purely coincidental that last Tuesday UBS put out a 'sell' recommendation, followed by similar advisories from Citi and Credit Suisse on Wednesday, just ahead of Newcrest’s announcement of the review outcomes on Friday?
It stretches credulity that it was but Newcrest is adamant that (a) its board hadn’t come to any conclusions on its management’s business plan and 2013-14 budget until Friday morning and (b) that it treats its disclosure obligations seriously – i.e. it doesn’t selectively brief analysts.
Until the board signed off on the review, the business plan and the budget, of course, the information was incomplete and therefore there would be no disclosure obligation.
As Newcrest said in its response to the ASX query until the board actually approved the budget there was no certainty that it would be approved – it could have referred it back to management for amendment, in which case there would have been no announcement on Friday.
There is a possible explanation for the peculiar coincidence of three different investment banks issuing downgrades in the days leading up to the announcements that accelerated a meltdown in Newcrest’s share price that had begun even before the analysts issued their recommendations. Newcrest shares had been above $15 early in the week. This morning they were trading below $12.
It is conceivable that the analysts were aware that there was a board meeting scheduled to consider next year’s budget and the state of this year’s accounts. They wouldn’t have to be futurologists to have realised that could lead to some big writedowns in asset values and lower production guidance.
As my colleague Alan Kohler indicated earlier this week (No gilding Newcrest’s market debacle, June 10) the key contents of the statement shouldn’t have shocked the market, although the declaration that there would no final dividend this year and guidance that the group would be free cashflow neutral next year at the current gold price and exchange rates might have been an unpleasant surprise.
The macro influences on the review and the $5 billion-$6 billion of writedowns Newcrest has flagged – the fall in the gold price this year from around $US1700 an ounce to below $US1380 an ounce and the value of the Australia dollar – aren’t exactly unknown to the market and the analysts who follow the company. Nor were the production issues and high costs that have plagued the group in recent years.
The Newcrest response to those influences on its performance was also predictable, given that it is similar to what just about every resource company in the world is doing. It is pulling back on capital and exploration expenditures, cutting costs across the board and suspending mining of its higher cost ounces.
While the possibility that the coincidence of the timing of the downgrades and the review outcomes was purely due to alert analysts with a deep understanding of the group it is unlikely that the Australian Securities and Investment Commission will read Newcrest’s response to the ASX query and close the file.
If there were no selective briefings (and it is difficult to believe a group as big and sophisticated as Newcrest would be silly enough to try to soften the market up by giving particular analysts any tip-offs) it is possible that, given the review did involve deep corporate cost-cutting and the closure of Newcrest’s Brisbane office, that an inkling of what was to come was percolating at levels lower within the group than the board and senior management team.
ASIC will no doubt be keen to ascertain whether specific elements of the review’s findings and recommendations, and of the budget for next year, were leaked to the analysts or the market-at-large and even more keen to know whether anyone traded Newcrest shares on the basis of information not generally available to the market.