Newcrest Mining Ltd (ASX: NCM) has been one of the large-caps making waves in 2019 so far. Newcrest shares are trading around the $31.30 mark today, after making a new 52-week high last week of $32.74. This 52-week high also marks the highest price Newcrest has been at since March 2012. So is the Newcrest share price overvalued at these levels? Or its there further upside in this gold miner?
A profile on Newcrest
Newcrest is Australia's largest gold miner, with a market capitalisation of just over $24 billion. The company owns and operates mines in Australia, Papua New Guinea, the Ivory Coast and Indonesia. Newcrest has an active prospecting program, as it places great importance on the continued expansion of its gold reserves. Its most recent interest has been the Red Chris mine in British Columbia, Canada, which Newcrest has just acquired a 70% stake in.
Newcrest is able to boast a cost-basis of US$738 per ounce of gold mined, which is a very promising figure (considering the price of an ounce of gold is currently US$1,393). This means that on current prices, Newcrest's profit per ounce is approximately US $655.
Is Newcrest overvalued?
Let's use a simple measure of Newcrest's gold reserves to attempt to answer this question. Newcrest estimates that its current gold reserves are roughly 62 million ounces (as of the 2018 annual report). This gives Newcrest's current reserves an approximate value of US$86.37 billion ($123 billion in Australian dollars) on today's gold price, which is looking pretty good considering Newcrest's market cap of $24 billion.
However, there are a couple of other factors to keep in mind. Newcrest estimates that its gold reserve life is around 26 years (meaning that it will run dry of gold in 26 years' time without additional supply going online. Additionally, the current gold price is high by historical standards and may not hold up at these levels for a long period of time.
Foolish takeaway
If the gold price can stay at these levels (or rise), the value of Newcrest shares will probably rise to reflect the value of its underlying reserves. But resource stocks are notoriously volatile, and no one can predict what the prices will be next week, let alone 5 ,10 or 26 years down the track. Remember that buying Newcrest shares is a bet on the future price of gold, which will either end very well or very badly.
