Gold and copper mining magnate, Newcrest Mining Limited (ASX: NCM) today released its half-year results for the 6 months to 31 December 2016. It posted a strong performance with much higher profits, although the company has some work to do to justify today's hefty price tag. Here's what you need to know (all figures in US$)
- Revenues rose 17% to $1,807 million
- Net Profit After Tax rose 131% to $187 million
- Dividends of 7.5 cents per share
- All-In Sustaining Cost (AISC) of $770/tonne, flat on last year
- Average realised price of $1,277 per ounce of gold and $2.30 per pound of copper, up 15% and 0% from last year respectively
- Debt steady at 1.3x Earnings Before Interest, Tax, Depreciation, and Amortisation (EBITDA), gearing of 20.8%
So What?
Newcrest's results are a prime example of what can happen when production costs hold steady, yet the average realised price for a product rises. The price of gold rose substantially during the past half-year to result in a huge uplift in Newcrest's profits. Gold production rose 2%, primarily due to improved milling rates, and could rise further due to investments in this area made in the half.
Newcrest's gearing remains moderate, and its resource reserves remain strong with an estimated 65 million ounces of gold, 11 million tonnes of copper, and 38 million ounces of silver. It was good to see production costs remain steady, as changes here are one of the big things that have brought gold miners undone in the past.
Now What?
With a conservative approach to dividends and its balance sheet, alongside the available liquidity to support capital investment or acquisitions, Newcrest once again looks like an attractive through-the-cycle gold miner.
The big thing I am concerned about is the company's share price.
Assuming a full-year profit of approximately A$500 million (slightly more than double the half-year result, assuming constant exchange rates), Newcrest is valued at about 35 times its full-year earnings. That is mighty rich for a company with no control over the end price of its products.
There are three ways to make money in Newcrest at the moment – for production to go up and prices to fall, for the price of gold to rise, or for the Australian dollar to weaken against the U.S. dollar. The latter two are tenuous and rely on factors that are entirely outside of Newcrest's control.
Without a good view of either the Australian dollar or the price of gold, buyers are potentially taking on a lot of risk in Newcrest. For my money, the company is too expensive at today's prices and I would not recommend it to readers.
