Newcrest: Result 2012

Although higher gold prices propelled Newcrest Mining’s revenue 8% higher for the full year, underlying profit rose just 2% to $1.08bn. Flooding in New South Wales and technical problems at Lihir drove production 8% lower to 2.3m ounces. Earnings per share rose 3% to 142 cents per share, from which a 35 cent partly-franked dividend was declared  (ex date not yet known). Operating cashflow was unchanged at $1.7bn, but the company spent $2.7bn on capital expenditure, leaving it with negative free cashflow of about $1bn.

The lack of free cashflow has become a habit for Newcrest; over the past decade, it has reported positive free cashflow just twice. At a time of soaring gold prices, it’s an appalling record. Already consuming billions of dollars, project development at Lihir, Cadia and Hidden Valley will devour another $1.8-2bn next year, so free cashflow will remain elusive.  

As in the rest of the industry, higher costs took their toll; Newcrest spent almost $500m more this year to mine less gold. Cost inflation is the bane of the industry, but it appears particularly savage in Papua New Guinea and Australia, where most of the company’s assets are located.

There is some good news for investors, however. The imminent release of a reserves upgrade at the Wafi-Golpu mine in Papua New Guinea may confirm what we’ve long suspected; this has the potential to become a huge gold mine. The share price has risen 8% since The gold price myth on 30 Jul 12 (Hold - $23.60) and progress here offers a reason to HOLD.