There is a curious trend emerging in the Newcrest Mining Ltd [ASX:NCM] share price; the gold price is headed up while its share price is headed down.
The share price has shed over 6% in the past six months, while the gold price (AUD) has soared over 23% in the same period.
On the surface the company looks reasonably healthy, given the impacts of the coronavirus pandemic.
At its latest quarterly results, NCM gold production in the March quarter was 6% lower than the prior quarter.
This was thanks to lower production at Cadia and Telfer mines and the divestment of the Gosowong mine, which offset the higher production at Lihir and Red Chris mines.
The total all-in sustaining cost (ASIC) fell by 4% in the March quarter, favourably effecting ASIC margins, which grew around 25%.
So, with higher production expected in June due to lower levels of planned shutdowns and favourable gold prices and operating currencies, shouldn’t the NCM share price be going up?
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Is NCM’s share price a risk at current levels?
Just like with gold mining, sometimes you just don’t know what’s under the surface until you start digging.
It appears that Newcrest has been quietly struggling with its Lihir and Telfer mines.
Production at Lihir is expected to be 17–20% lower than previously expected — normally the biggest gold producing mine within NCM’s portfolio.
Guidance has been cut to less than 90% of its initial target and is estimated to be around 2.1–2.2 million ounces.
Newcrest also comes with a pretty hefty amount of debt.
In the six months to 31 December 2019, NCM grew its debt by 246% to US$1.36 billion.
This spike in net debt represents a leverage ratio increase of 300% to 0.8.
While a leverage ratio of around 2.0 is considered risky by some, the question is whether NCM can reasonably sustain this amount of debt.
The miner today released a new series of debt funding in order to buy back near-term corporate bonds.
The company will issue two new corporate bonds to the value of US$1.15 billion to secure long-term debt at lower rates.
Newcrest recently completed an AU$1 billion share placement to fund growth of its Fruta del Norte mine.
What does this mean exactly?
Difficulties with Lihir mine means difficult decisions
Well, NCM investors might be disappointed with current performance given the current price of gold.
It seems, with the mishaps and disappointment with the Lihir mine, that they are aggressively seeking to claw back cash flow by spending big.
And they’re doing this with lots of debt and topping it up with equity.
This may not be the ideal way forward.
Having purchased the mine a year ago for US$806 million, Newcrest’s entire investment proposition rests in discovering high-grade copper and gold beneath the existing pit, the AFR notes.
The geology of Lihir is forcing NCM to go after lower grade targets and pushing up costs.
At present, in my eyes, the only solid mine they have going is the Cadia mine, which has experienced some delays due to COVID-19.
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