Newcrest Mining Limited

Company Overview: Newcrest Mining Limited (ASX: NCM) is one of the world's largest gold mining companies. The company’s operating mines are located in Australia, Canada and Papua New Guinea. The company owns and operates a portfolio of predominantly low-cost, long-life mines and a strong pipeline of brownfields and greenfields exploration projects. The company uses a variety of efficient mining methods and selective underground mining methods to optimise high-grade epithermal deposits and porphyry deposits.

NCM Details

Statutory and Underlying Profit (Source: Company Reports)

Looking ahead, the company is focused on maintaining a robust balance sheet to invest capital in value-creating opportunities while providing decent returns to shareholders. NCM intends to maintain a conservative level of leverage on the balance sheet. With a long reserve and resource life, a unique set of technical skills, a healthy balance sheet, various organic growth options and an exciting exploration pipeline, the company is well placed to weather the global uncertainty associated with COVID-19 and to progress towards its future growth agenda.  

Improved Financial Performance in H1FY21: For the six months ended 31 December 2020, the company reported total revenue of US$2,172 million, up by 21% on the previous corresponding period (pcp). Further, the company reported a statutory profit of US$553 million, up 134% on pcp, driven by higher realised gold and copper prices, higher copper production at Cadia, a positive fair value adjustment recognised on NCM’s investment in the Fruta del Norte finance facilities, and a full six months of improved Red Chris performance. For the half-year period, the company has reported a free cash flow of US$439 million, up 160% on pcp. The company’s Board has recently approved a new dividend policy that retains the minimum dividend of 15 cents per share per annum but more than doubles the target percentage of free cash flow to be paid in dividends to 30-60%. For the half-year period, the company has announced an interim dividend of US 15 cents per share, up by 100% on pcp. The dividend has a record date of 19 February 2021 and payment date of 25 March 2021. As at 31 December 2020, the company had liquidity coverage of US$3,744 million, comprising US$1,744 million of cash and US$2,000 million in committed undrawn bilateral bank debt facilities with maturity periods ranging from 2021 to 2023. The company had net debt of US$330 million as at 31 December 2020.

Key Margins: The company’s profitably margins have improved over the last five years, reflecting decent production and low-cost operations. Gross margin for FY20 stood at 34.5%, up from 29.2% in FY19. EBITDA margin for FY20 stood at 46.3%, up from 44%. Current ratio for FY20 stood at 2.90x in FY20.

Past 5-year Financial Performance for Year Ending 30 June, Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 28.61% of the total shareholding while the top four constitutes the maximum holding. Allan Gray Australia Pty Ltd and The Vanguard Group, Inc. are holding a maximum stake in the company at 9.88% and 4.71%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

FY20 Result Highlights: FY20, the company reported total gold production of 2.2moz and copper production of 138kt. The company reported a statutory profit of US$647 million and an underlying profit of US$750 million. Over the year, the company invested ~US$1.3 billion to acquire a 70% interest in, and operatorship of, the Red Chris mine in Canada. The company also made investments in Lundin Gold to increase its interest to 32%. During FY20, the company finalised the sale of its 75% interest in the Gosowong mine for a total consideration of US$90 million. As at 30 June 2020, the company’s net debt stood at US$624 million.

FY20 Result Snapshot (Source: Company Reports)

Lihir Mine Improvements: The company has leveraged its technical capabilities to establish a pathway to unlock significant value from Lihir. NCM has finalised an optimised mine plan that is expected to reduce the levels of argillic mill feed presentation in the future. It is expected that the company’s approach to mining Phase 14 has the potential to bring a considerable amount of high-grade mineralisation from resource into production in the very near future. Currently, the company is progressing a study with an aspiration for Lihir to be a 1 million ounce plus producer each year for around 10-12 years from FY23 at around 15 mtpa milling rates.

Key Risks: The company is exposed to the risks and uncertainties caused by the COVID-19 pandemic. Further, the company is exposed to the risks related to the fluctuations in the gold and copper prices. The company is also exposed to foreign currency risk.

Outlook: Looking ahead, the company’s objective is to meet all financial obligations, maintain a decent balance sheet to withstand cash flow volatility, and invest capital in value-creating opportunities. At its Havieron Project, the company is finalising the Water Management Plan for the early works program and is progressing work to start the development of an operating underground mine and associated infrastructure at the Project. The company is targeting a total annual dividend payout of 30-60% of free cash flow generated for FY21, with the annual total dividends being at least US 15 cents per share on a full-year basis. For FY21, the company expects its gold production to be towards the upper end of the guidance range of 1,950 – 2,150koz, subject to market and operating conditions and assuming no material COVID-19 related interruptions. Copper production in FY21 is expected to be between 135 – 155kt.

FY21 Guidance (Source: Company Reports)

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

** 1 USD = ~1.29 AUD

Stock Recommendation: Over the last three months, the stock has corrected by 14.26% and is trading lower than the average 52-weeks price level band of A$20.7 and A$38.15, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~A$21.09 and a resistance of ~A$28.23. We have valued the stock using a P/E multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at a slight premium to its peer average P/E (NTM Trading multiple), considering its low-cost operations, recent acquisitions, and improved gold price environment.  We have taken peers like OceanaGold Corp (ASX: OGC), Northern Star Resources Ltd (ASX: NST), and Gold Road Resources Ltd (ASX: GOR). Considering the company’s decent performance in H1FY21, revised dividend policy, FY21 guidance, modest outlook, current trading level and valuation, we give a “Buy” recommendation on the stock at the current market price of A$23.860, down by 2.453% as on 2 March 2021.

NCM Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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