Newscrest rides wave of uncertainty

As quarterly production reports and quarterly activity reports start to hit the market, I thought I'd have a look at one of the more intriguing stories on the Australian Securities Exchange (ASX), Newcrest Mining (ASX code: NCM).

With record high gold prices being the headline act of the September quarter, investors have been asking: "What's wrong with Newcrest?"

Newcrest is the largest listed gold producer on the ASX, with a market capitalisation of $25 billion, and the fifth-largest gold miner in the world by output.

In October 2010, Newcrest took over the then second-largest gold producer listed on the ASX, Lihir Gold, leaving it head and shoulders above the nearest Australian competitor in terms of market cap.

With the rampaging gold price, many expected Newcrest to follow suit, but this has not been the case, because operational issues have plagued the company's performance.

In the September quarter, Newcrest said cash costs rose 10 per cent to $A594/oz, while gold output fell 16 per cent to 587,296 troy ounces.

The miner's gross cash margin actually climbed 19 per cent for the quarter because of the higher gold price, with Newcrest averaging $A1623/oz, a handy profit margin of $1029/oz.

The higher costs were a result of maintenance shutdowns at the Lihir and Gosowong mines in Papua New Guinea, and the Telfer mine in the Pilbara region of WA. Rainfall also restricted mining at Lihir, after the region received more than 300mm over a two-day period in September.

Newcrest's Cadia Valley Operations at Orange in central New South Wales contributed the most to production, followed by Telfer, Lihir and Gosowong.

These four operations contributed 85 per cent of Newcrest's gold production, with Cadia Valley and Telfer also contributing copper credits to the balance sheet, giving the company four strong producing assets.

The market did not like the Newcrest production report, with stock being sold down from $36/share to close Monday at $33.20/share.

Newcrest has historically traded at a high P/E ratio, currently 23 times, because of its reputation as a low-cost gold producer, although these metrics will come under scrutiny. The latest production report will put the company at risk of not meeting full-year production targets.

Forward looking P/E ratios show Newcrest being re-rated more in line with the general market, with the forecast P/E for FY12 being 16 times earnings and the forecast for FY13 being 13 times earnings, according to Bloomberg consensus data.

So back to the original question - what is wrong with Newcrest?

The fundamentals underlying the stock are solid with four quality production assets and a range of exploration activity underway, it's just a question as to whether the current P/E is too high for a market that is valuing BHP at a forward FY12 P/E ratio of 7-8?

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_Information contained in this article does not consider your personal circumstances. You should consult a stockbroking professional before making any investment decisions. Sentinel may hold positions in stocks discussed from time to time. _