Last Friday the Newcrest Mining Limited (ASX: NCM) share price hit the $30 mark, its highest level since March 2012 and an increase of almost 45% in six months. The share price has opened slightly lower today and is trading around the $29.88 mark at the time of writing.
A refresher on Newcrest
Newcrest is Australia's largest gold mining company and owns and operates five production areas in four countries – Australia, Papua New Guinea, Ivory Coast and Indonesia. The company estimates it has about 25 years' worth of gold reserves across these mines and continues to actively explore new potential deposits and mining sites as part of its expansion strategy.
Why the share price has been hitting the roof
Newcrest has an extremely low cost-basis at around US$738 per ounce of gold mined. This gives the company an incredibly stable financial position, as the gold price has not been close to this level since 2008. Gold prices have been on a tear over the last 12 months to boot. The US–China trade war combined with heavy buying from state Central Banks – mainly China and Russia – continues to lift the gold price. According to Kitco, the People's Bank of China alone added nearly 16 tonnes of gold to its reserves in May. Such scale of demand is likely to solidify the price floors under gold for the foreseeable future.
Gold is today trading around the US$1,340 per ounce range – its highest levels since 2016 and has risen from the US$1,180 level it was averaging in August last year. At this US$1,340 per ounce level, Newcrest has a profit margin of US$602 per ounce, which is a massive profit buffer. Also consider that Newcrest reports profits in Australian dollars, whereas gold is universally sold in US dollars. An ounce of gold in Australian dollars will currently cost you around $1,950 – the highest price in history in Australia. Newcrest is swimming in an unprecedented ocean of cash, investors have seen this writing on the wall, and ignited the rocket under the Newcrest share price.
Foolish takeaway
At these price levels, I think that a higher future gold price has already been written into the Newcrest share price. While it is very possible that gold will continue to surge, I think that entering a position at current prices is a risky move with more downside risk than upside.
