Newcrest Mining

Newcrest Mining’s half year result reflects record high gold prices and growing production. Net profit after tax rose 50% to $659m, including $55m in gains from asset sales. Operating cashflow rose 9% to just over $1bn. Earnings per share rose 32% to 86 cents, from which a 12 cent dividend was declared (ex-date 19 Mar), up 20% from last year. Gold production increased 1% to over 1.2m ounces of gold for the half year. In summary, profits are high, production increasing and, as we noted in The case for gold on 16 Apr 2010, this analyst expects higher gold prices to endure. Why, then, do we continue to shun the country’s largest gold miner?

Renowned for its technical excellence, Newcrest doesn’t shy away from complex, challenging assets. Almost all its mines are difficult, geologically or geographically. This hasn’t stopped immense sums of capital expenditure being poured into new ventures. In Papua New Guinea and Fiji, fiendishly difficult places to mine, Newcrest has outlined spending plans worth $6bn. Cadia, the second largest mine in Australia, will devour a further billion dollars.

Risks to Newcrest’s plans are difficult to quantify and difficult to overcome. Papua New Guinea, a tomb for many miners, shows no signs of becoming an easier place to do business. Fiji displays outright hostility and Lihir, the company’s largest asset, sits inside a volcano.

When lots of money chases lots of complexity, things can go wrong. Investors should demand a discount for that possibility. At today’s price, there isn’t one. Newcrest’s share price has fallen 12% since 16 Aug 11 (Avoid - $39.12) but the recommendation remains AVOID.