The Newcrest Mining Limited (ASX: NCM) share price has risen by 93% in 2016.
This beats resources peers such as Rio Tinto plc (ASX: RIO) and BHP Billiton Limited (ASX: BHP), which are up by 11% and 13% respectively. Newcrest now has a price to earnings (P/E) ratio of 50. Is it time for investors to take profits or hold on?
Financial improvements
Newcrest's financial standing has improved in financial year 2016 and is no longer a reason for investors to avoid it. The company's net debt has reduced by 27% to US$2.1 billion over the year. This follows a reduction in its debt to equity ratio of 9 points last year, from 51% in FY 2014 to 42% in FY 2015.
Further, it has signed agreements to extend the term of its unsecured bilateral bank lending facilities on improved terms following an improvement in free cash flow. This free cash flow trend is set to continue since full-year capital expenditure forecasts were cut in March to between US$440 million and US$540 million from between US$480 million and US$575 million.
Newcrest has also reduced its all-in sustaining cost per ounce on a group basis by 2.3% to US$762 per ounce for FY 2016. This is largely due to the Edge programme, where Newcrest seeks to improve its operational performance and optimise capital deployed. This delivered $390 million in cash benefits in FY 2015 and more productivity gains are anticipated in future as Newcrest focuses on bottom-up innovation and increased operational discipline.
Diversity
Newcrest's geographical diversity reduces its risk profile and improves its risk/reward ratio. It has interests in assets across Australia, as well as in the wider south-west Pacific region and in West Africa. This means that the chances of production disruption from events such as natural disasters and political issues are reduced.
However, its lack of diversity among the commodities it produces equates to higher risks for investors. Newcrest's production and financial performance remains focused on gold – especially following the 14.2% fall in copper production in FY 2016. Although this has been beneficial in 2016 since the price of gold has increased by 27% year-to-date, its outlook is less certain.
On the one hand, increased global economic uncertainty following Brexit as well as only one forecast rise in US interest rates in the next year could boost gold's price. The US election may also increase uncertainty and cause investors to seek out lower risk assets such as gold.
However, the gold price is forecast to fall to below US$1000 per ounce over the next four years as US interest rates rise to 2.25%. Therefore, Newcrest's margins may be squeezed since it is a price taker and for this reason, investors might want to look to take some profits off the table.
