Company Overview: Newcrest Mining Limited (ASX: NCM) is mainly involved in the exploration, mine development, mine operations, and the sale of gold and gold/copper concentrate. NCM owns and operates a portfolio of predominantly low-cost, and long-life mines. The company’s operating mines are located in Australia, Canada, and Papua New Guinea. NCM was listed on ASX on 4 June 1987.

NCM Details

Q1FY22 Operation Highlights: During the quarter ending 30 September 2021 (Q1FY22), NCM continued drilling at Red Chris to expand the known higher-grade mineralisation intersected at East Ridge. Some of the key highlights of the quarter are as follows:

• Production Update: For Q1FY22, NCM reported total gold production of 396koz and copper production of 25kt at an All-In Sustaining Cost (AISC) of $1,270/oz. Notably, the production was in line with the company’s expectations and reflects the replacement and upgrade of the SAG mill motor at Cadia, the completion of the re-bricking of Autoclave 4 at Lihir, and other planned maintenance shutdowns across the Group which is consistent with prior years.
• Findings of PFS Released: NCM has released the findings of the Red Chris Block Cave, Havieron Stage 1, Lihir Phase 14A, and Cadia PC1-2 Pre-Feasibility Studies (PFS). As per the studies, all four organic growth options are estimated to deliver an IRR of 16% or higher.

Key Takeaways of FY21 Results: For the year ended 30 June 2020 (FY20), NCM reported total gold production of 2.1 million ounces at an AISC of US$911 per ounce. Due to higher gold and copper prices, the company’s total revenue grew by 17% YoY to US$4,576 million.

• Earned Record Statutory Profit: Underpinned by decent operating performance and higher prices, NCM reported a record statutory profit of US$1,164 million in FY21, up 80% on the previous year.
• Rise in Dividend: For H2FY21, the company has declared a final fully franked dividend of US 40 cps, up 129% on pcp. This took the total FY21 dividend to US 55 cps, equating to a 41% payout of FY21 free cash flow.
• Increase in Cash Balance: As at 30 June 2021, the company had a cash and cash equivalent of US$1,873 million, up 29% from US$1,451 million as at 30 June 2020.

Revenue Trend (Source: Analysis by Kalkine Group)

Key Metrics: Gross margin for FY21 stood at 38.7%, up from 34.5% in FY20. Net margin for FY21 stood at 25.4%, up from 16.2% in FY20. Debt to equity ratio for FY21 stood at 0.17x, down from 0.24x in FY20. Current ratio for FY21 stood at 2.98x, up from 2.9x in FY20, demonstrating that the company has improved its ability to pay short-term obligations. Cash cycle days for FY21 stood at 19.8 days, down from 31.2 days in FY20.

Liquidity Profile and Profitability Metrics (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 35.27% of the total shareholding, while the top four constitute the maximum holding. Allan Gray Australia Pty Ltd and Van Eck Associates Corporation are holding a maximum stake in the company at 9.86%, and 5.01%, respectively, as also highlighted in the chart below:              

(Source: Analysis by Kalkine Group)

Acquisition of Pretium Resources: On 9^th November 2021, NCM announced that it has entered into agreement to acquire all of the issued and outstanding common shares of Pretium Resources Inc. (Pretivm). This acquisition is expected to expand the company’s presence in the highly prospective Golden Triangle region of British Columbia.

• As per the terms of the transaction, Pretivm shareholders will receive consideration of C$18.50 in cash per share or 0.8084 in NCM share for every share they own in Pretivm.
• The acquisition is subject to the approval of 66 2/3% of Pretivm shareholders, the Supreme Court of British Columbia, and regulatory approvals, which include approval under the Investment Canada Act.
• NCM believes that the acquisition would add a Tier 1 large scale, long-life, low-cost mine to its portfolio of Tier 1 assets and will instantly increase its gold production by >300koz pa (~15%) to well above 2Moz.
• The transaction is likely to be completed in Q1CY22.

Exploration Update: In an exploration update provided on 9 December 2021, NCM notified about the decent drilling results it has received at Red Chris and Havieron. At Red Chris, which is a joint venture between Newcrest (70%) and Imperial Metals Corporation (30%), the drilling has demonstrated continuity of the East Ridge zone (>0.4g/t Au and >0.4% Cu) over dimensions of 600m high, 500m long and 125m wide. At the Havieron Project, the exploration program has demonstrated potential for resource additions outside of the existing Inferred Mineral Resource limits.

Received Approval to Increase Cadia’s Processing Capacity: On 14 December 2021, NCM notified that New South Wales Department of Planning, Industry & Environment (DPIE) has given its approval to increase the permitted processing capacity of Cadia from 32Mtpa to 35Mtpa. The company has also received approval to repair the slumped section of the Northern Tailings Storage Facility (NTSF) at Cadia and revise the footprint of the NTSF and Southern Tailings Storage Facility.

Sale of Royalty Portfolio for US$37.5 Million: On 14 December 2021, NCM announced that it has entered into definitive agreements with Altus Strategies (Altus) and AlphaStream Limited (AlphaStream) to sell a portfolio of 24 royalties for a total consideration of US$37.5 million, payable upon completion of the transaction.

Key Risks:

• Commodity Price Risk: NCM is exposed to the risks related to the volatility in the price of gold and copper, as it could impact its financials.
• COVID-19 Uncertainties: The company is exposed to the uncertainties surrounding the impact of COVID-19 pandemic, as it could impact the company’s operations.

Outlook: If the acquisition of Pretium Resources Inc is completed, it will enhance NCM’s indicative gold production to be well above 2Moz per annum to FY30. Further, the acquisition will provide immediate operational and financial diversification from a Tier 1 jurisdiction.  NCM currently expects its gold and copper production to increase in the December 2021 quarter with lower planned shutdown activities and completion of the SAG mill motor replacement. Further, the company is on track to meet its FY22 production guidance of 1,800 – 2,000koz of gold and 125 – 130kt of copper.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

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.

Stock Recommendation: Over the last six months, the stock has corrected by ~16.40% and is currently trading lower than the average 52-week price level band of A$21.85 - A$29.27. The stock has been valued using EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). The company can trade at a slight discount to its peers, considering the fluctuations in gold price and uncertainties surrounding the impact of COVID-19 pandemic. For the purpose of valuation, peers such as Regis Resources Ltd (ASX: RRL), Evolution Mining Ltd (ASX: EVN), Northern Star Resources Ltd (ASX: NST), and others have been considered. Considering the company’s rising cash balance, expected benefits from the proposed acquisition of Pretium Resources, decent FY21 results, modest outlook, current trading level and indicative upside in valuation, we give a “Buy” rating on the stock at the current market price of $23.19 as on 14 December 2021, 12:30 PM (GMT+10), Sydney, Eastern Australia.

NCM Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined:  

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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