Company Overview – Newcrest Mining Limited (Newcrest) is a gold, copper and silver producer that has operations and exploration projects in Australia, the Pacific region, Asia and West Africa. The Company’s segments include Cadia Valley, Telfer, Gosowong, Lihir, Hidden Valley JV, West Africa (includes Bonikro operations and exploration and evaluation activities in Cote d’Ivoire) and Exploration and Other. Exploration and Other mainly consists of projects in the exploration, evaluation and feasibility phase and includes Namosi in Fiji, Wafi Golpu in Papua New Guinea (PNG), and Marsden and O’Callaghans in Australia. Cadia Valley Operations (CVO) is a gold mining operation and is 100% owned by Newcrest. It is located approximately 25 kilometres from the city of Orange in central west New South Wales and is 250 kilometres west of Sydney.

Analysis – Newcrest has reported gold production of 621 koz for the December quarter equivalent to2.48Moz per annum which is 8% ahead of the top end guidance range for FY14. Telfer and Cadia delivered bulk of the production. Copper output for the quarter was 22.6 kt, 13% at the upper end of the guidance range. With the production for the first half of FY14 totalling 1.2 Moz the risk is to the upside.

The 13% uplift at Cadia suggests the cave is ramping up well. The strong telfer performance can significantly improve unit costs which were elevated in 1Q to A$1296/oz. Non-core small mines Bonkiro and Hidden Valley both improved significantly. Telfer delivered a very satisfactory grade driven result.
Newcrest has now delivered there consecutive pleasing quarters, above market expectations, above guidance and above internal expectation. The strong, grade and reliability driven December quarter was not anticipated. In our view stronger than expected December Quarter production was delivered by: conservative Newcrest forecasting and market guidance, substantially improved Lihir reliability not factored into guidance while the old plant is still undergoing remediation, surprisingly good ridgeway grade and tonnes that cannot be reliably projected but are a consequence of the cave delivery and higher Telfer open pit grade than expected.

Telfer delivered its second best quarter of production over the past three years, driven by grade and increased throughput and recovery for the underground shortfall in the September Quarter. Cadia East continued to ramp up and should see a step change post the June Quarter commissioning of the second crusher. Each crusher has a capacity of 10 Mtpa. Dollar million cash costs continued to fall and are now forecast to be toward the bottom end of guidance while production is expected to be towards the top end. Even bonikro returned to better output and lower costs as the cutback was completed and higher grade ore was accessed. While the gold price was unfavourable sales exceeded production, production exceeded expectation and costs were below expectations.

We believe that there are quite a few key upside risk factors including: production tracking ahead of guidance with potential for an upgrade to production guidance, higher grades from Cadia East, refinancing of shorter dated debt facilities with longer dated debt and stronger commodity prices with a weaker AUDUSD.


Source - Company Reports

In our view the December Quarter 2013 production demonstrates the potential turnaround story for Newcrest given the combination of sustainable cost out at Telfer and Hidden Valley along with a improving operational outlook at Lihir and Cadia East. Newcrest’s activities incorporate six gold mining operations in Australia, PNG and Africa. Following the divestment of Mt. Rawdon and Cracow, Newcrest holds a 33% stake in Evolution Mining. Newcrest has two long mine life assets (Cadia & Lihir) with the group gold output and cash costs to improve as the low cost Cadia East development ramps up  and high cost assets are potentially closed. Aussie Dollar retreat provides some offset to the US Dollar gold price, but the average of A$1,372/oz for December Quarter price is below the initial forecast of breakeven below A$1,450/oz. All operations had all in sustaining costs (AISC) below the average spot price and the capital expenditure spent in first half was well below the FY2014 guidance.

Newcrest’s willingness and ability to adjust quickly to gold price changes was again confirmed by the cessation of stockpile treatment at Cadia. Perhaps the key positive outcome for the quarter was that all operations achieved an all in cash sustaining cost below the average gold price for the quarter even the long-time challenged Hidden Valley operation. Management projects future cost improvement opportiun5ites from Hidden Valley, indicating that the objective to neutralising the cash bleed has been achieved and can be sustained.
 

Source - Thomson Reuters

The near term outlook for NCM looks good with materially lower cost base. A falling currency, a sideways trading gold price and the return of operational reliability and predictability. The pleasing part of NCM’s first half was that all in cash operating cost performance even including non-cash add ons was comfortably below the average gold price for that period. Both Hidden Valley and Bonkiro moved from cash negative in September Quarter to cash positive in December Quarter, despite a lower gold price with permanent improvements made to the cost base. Telfer was the main unsustainable contributor to the strong half with elevated December Quarter grades not expected to be sustained.

NCM (AUD, Millions)	2013	2012	2011	2010	2009
Total Revenue	3,775.0	4,416.0	4,102.0	2,801.8	2,530.8
Gross Profit	845.0	1,809.0	1,701.0	1,233.1	892.8
Total Operating Expense	9,963.0	2,839.0	2,802.0	1,990.8	2,121.1
Net Income After Taxes	(5,776.0)	1,175.0	966.0	602.4	282.1

 
The top end of 2 – 2.3moz guidance range has been maintained as guidance. We suspect that this can be exceeded. The management have indicated that despite the  $70 Million tax payment, the year is still expected to be cash neutral and this can be achieved at a lower gold price than previously stated at A$1450/oz. Management stresses that costs, production and capital expenditure will continue to be actively managed for no worse than a cash neutral outcome. Management has confirmed that all debt costs are fixed or have fixed points relative to libor so any ratings change impacts the cost future debt and not the existing facilities. We would be putting a BUY recommendation on NCM at the current closing price of $9.65.
 

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