Newcrest Mining
Recommendation
Newcrest Mining must be cursing the acquisition of the Lihir Mine. After paying $9.5bn, problems continue to surface. The latest involves a damaged autoclave (needed for move and process ore) that will restrict output from Lihir. As a result of the defect, Newcrest has lowered its production forecast from 2.5m ounces of gold to between 2m and 2.15m ounces. The market reacted savagely, sending the share price lower by 14%, striking over $1.4bn of value from the business.
That was an overreaction. The autoclave problem will take about 8 weeks to repair and the billion dollar upgrade of Lihir remains underway. The mine is the fourth largest in the world and will produce gold for decades but there is little doubt Newcrest overpaid for the asset. Newcrest currently carries almost $3.7bn of goodwill on its balance sheet. There is a good chance that some of that will be written down. Like most of Newcrest’s assets, Lihir is complex. Ore requires extensive processing, increasing fixed costs at the mine. Lihir can only make decent returns if output is hugely expanded. Despite poor returns to date, the company must continue to pour capital into the mine.
Newcrest holds some of the best gold ore bodies in the world. We are particularly impressed with the developing Wofi-Golpu mine in Papua New Guinea. At around book value, or below $20 a share, an upgrade beckons. For now, with the share price down 18% since 08 Feb 13 (Hold – $24.46), we're sticking with HOLD.