The year started out with such promise for Newcrest Mining Limited (ASX: NCM).
After a strong December-quarter with lower-than-anticipated costs the gold and copper miner quickly announced increased guidance for full year production. At the same time the price of gold was finally edging up giving investors renewed hope in the company.
Confidence jumped, and just weeks into the new calendar year Newcrest's share price was up 26%.
Newcrest wasn't alone, shares in Northern Star Resources Ltd (ASX: NST) and EVOLUTION FPO (ASX: EVN) also took off. But now, that the gold price is crashing back down towards US$1,000 per ounce, it is Newcrest alone facing a rare triple threat.
Threat #1 – Gold price
The first threat is obviously the falling gold price. Investors have been abandoning the metal in droves with no sign of a recovery in demand to stop the descent.
Above: The rapid recent fall in gold price. Source: Bloomberg.com
Threat #2 – Copper price
"Ah ha!" – I hear you say – "But Newcrest is a low cost miner. As you yourself have so eagerly pointed out, Newcrest will be one of the best placed gold miners to ride out volatility and maximise margins."
And you would be right… if the price of copper wasn't also falling off a cliff. Copper made up almost 19% of Newcrest's sales revenue for the six months to 31 December, 2014. The metal is a by-product of the gold mining process and gets credited towards Newcrest's cost figures for its gold production. For the most recent June quarter by-product credits reduced Newcrest's 'total costs' per ounce by $271 to $1055.
Above: The price of copper has also fallen off a cliff since May. Source: Bloomberg.com
A lower copper price means less contribution towards costs and lower margins.
"But wait!" – you definitely interject – "The fall in both gold and copper prices will be offset by the lower AUD!". And yes, you're right; the Aussie dollar has fallen around 7.6% since May. But gold is down 7.9% and copper has slumped 18.8%.
The net result is likely only a slight decrease in Newcrest's Australian dollar gold price, helped by a recent increase in copper production volumes.
Threat #3 – Debt
But here's the kicker: Newcrest has a huge pile of debt, priced in U.S. dollars. While the falling AUD is good for earnings in U.S. dollars, it works in the opposite direction when paying back debt. Newcrest reported around US$3.6 billion in long-term debt liabilities at 31 December, 2014 and threw US$220 million at the pile during the first half of the financial year. However the exchange rate impact at the time meant almost no change to the company's gearing position.
Since then the AUD has only fallen further, and while some gold miners will be receiving extra protection from the falling exchange rate, Newcrest's debt pile quickly sucks out any potential benefit from the pockets of investors.
For Newcrest investors the warning is clear; if the three factors continue to deteriorate in tandem investor confidence may quickly start to fall too.
