Newcrest: Interim result 2013

Even as the gold price stayed well above $1,600 an ounce, Newcrest Mining announced sharply lower half year profits. Gold production fell 18% to 950,000 ounces, reducing revenue 23% to $1.8bn. Net profit after tax fell 51% to $320m, translating to earnings per share of 42c, down 51%. Directors declared an unfranked interim dividend of 12c per share (est. ex-date 26 Mar), unchanged from last year.

The lack of free cashflow remains a consistent concern. Net operating cashflow fell 78% to just $225m while more than a billion dollars flowed to fund growth projects. Newcrest has generated free cashflow in just two of the last ten years so this is no anomaly. Unsurprisingly, debt jumped 33% to $3.2bn. The Hidden Valley mine in Papua New Guinea had a particularly lean half year, with production falling 17% and costs escalating to over $1,600 an ounce. Newcrest actually lost money on every ounce of gold mined at Hidden Valley and management are well aware that the asset needs attention.  Most mines in the portfolio registered small declines but that might prove temporary; a result of lower grade ore and lower recoveries rather than the systematic problems of the sort that appear to be affecting Hidden Valley operations. Currency movements also affected results with the appreciation of the Australian dollar, the PNG Kina and the Indonesian Rupiah all detracting from profits.

For the full year, the company has maintained an output target of over 2m ounces of gold so higher profits beckon. There is still some concern about the rate of return Newcrest will earn from its additional spending, especially at Lihir which has habitually been a low return asset, and we’ll be watching the full year results with interest. 

Newcrest isn’t expensive at the moment and, at around $20, we would consider upgrading it. For now, with the share price down slightly since 13 Aug 12 (Hold - $25.39), we’re sticking with HOLD.