Australian diversified gold miner Newcrest Mining (ASX:NCM) released its full year results this morning showing a statutory profit of $546m and a 22% reduction in debt.
Newcrest Mining’s total sales revenue increased 8% to $4.3bn up from $4bn in FY14. Last year the company announced a $2.2bn statutory loss which was munch affected by write downs and strategic reviews. For the year ended 30 June 2015 NCM achieved a net profit of $546m which enabled the company to reduce debt and lift its net tangible assets per share to $11.72 (FY14: $9.94)
As expected by the market directors will not pay a dividend for the period despite the $546m profit. Following years of struggles that have challenged the very existence of the company, the main priority will remain debt reduction and balance sheet strength.
NCM closed at $10.95 on Friday, well below its 2015 highs achieved in April and May. The stock has recently declined ~25% as gold price weakness dampens the outlook for the industry. NCM gained around 4.5% on the opening this morning, following the release of its financial report.
Nevertheless, most investors forget to consider currency movements, especially the decline of the AUD versus the USD, which has offset most of the declines in the gold price. In fact, gold prices remains at very competitive prices when quoted in Australian Dollars.
Outlook for Newcrest Mining
Newcrest Mining has managed to reduce its USD-denominated debt by USD 819m to USD 2.89bn which is a decrease of 22%. Gearing levels are at 29.3% as of 30 June 2015. The high debt poses an ongoing threat to shareholders as NCM remains reliant on the volatile gold price as well as currency fluctuations. Any unfavourable movements may significantly impact its credit rating and therefore future operations. Free cashflow surpassed AUD $1bn during FY15. All-in sustaining production costs were 12% lower to USD 789 or AUD 941 per ounce making NCM one of the lowest cost-producers in the world.
NCM is one of the most technically sound gold equities in the world with Cadia Valley being one of the lowest cost operations. While commodity price volatility will be the main determinant for NCM’s share price, the upside potential remains significant as the stock would benefit from any cyclical recovery. Since 2011 gold has underperformed equity markets amid monetary stimulus of central banks as well as low interest rates. In addition, a strong USD weighs on global gold futures and the expectation of gradual interest rate increases in the U.S. is expected to further strengthen the U.S. currency. Wise-owl expects further struggles for the gold market, however high-risk investments have been in a bull market since the global financial crisis (GFC) and are now approaching historically high valuations which could be a reason to buy back into gold over the upcoming 12-24 months. Due to NCM’s competitive position and low cost operations, it will be one of the most attractive opportunities in the gold sector.
Author: Simon Herrmann
Aug 17, 2015
Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.