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Gain Exposure to Gold Through Newcrest Mining

- By Alberto Abaterusso

Newcrest Mining Ltd. (NCM.AX) is a Melbourne, Australia-based mining company engaged in the production and sale of gold and copper.

The company has operations in Australia (Cadia and Telfer mines), Papua New Guinea (Lihir mine), Southeast Asia (Gosowong mine in Indonesia) and West Africa (Bonikro mine in Cote d'Ivoire). The company is also developing mineral projects in Papua New Guinea and the Fiji Islands.


Newcrest also mines silver, but revenue from this segment accounts for 1% of the company's total revenue. Gold accounts for approximately 86.3% and copper composes 12.7% of the miner's revenue.

What I like about Newcrest Mining, which positions it at the same level as its North American peers like Barrick Gold Corp. (ABX), Goldcorp Inc. (GG), Kinross Gold Corp. (KGC) and Newmont Mining Corp. (NEM), is its 65 million ounces in gold reserves as of June 30 and the mine life. Newcrest can exploit its gold reserves for at least 27 years. Both figures are among the best in the global gold stock industry.

Based on this information, the company has an EVO - or enterprise value per ounce of gold reserve - 283.69 Australian dollars ($226.31), which is currently one of the cheapest in the industry, compared to Barrick's EVO of $307.04, Goldcorp's EVO of $345.45 and Newmont's EVO of $333.87.

I also like the company's gold margin (the realized gold price per ounce minus the all-in sustaining cost, or AISC, per ounce of gold sold). Current operations enable Newcrest to produce approximately 2.4 million ounces of gold every year at an AISC of $787 per ounce sold. Compared to its North American peers, such as Kinross (2.6 million ounces of equivalent gold expected for full fiscal 2017 at an AISC of about $975 per ounce sold) and Goldcorp (2.5 million ounces of gold expected for 2017 at an AISC of about $850 per ounce), the Australian miner can deliver profit at a lower AISC per ounce of metal sold.

Financially, Newcrest Mining's balance sheet is robust. As of the most recent quarter, the company has $493 million in cash on hand and securities and total debt of $1.99 billion, which has a long-term maturity of 10 years. These two figures lead to net debt of $1.5 billion that the company - due to the high profitability of its assets - has been able to improve over time.

In regard to profitability, when bullion averaged $1,257.282 per troy ounce between the third quarter of 2016 and the second quarter of 2017, Newcrest Mining generated annual cash flow of approximately $1.47 billion from its operations. In comparison, Kinross Gold generated trailing 12-month operating cash flow of $956.3 million and Goldcorp produced $891 million.

After meeting its financial obligations, Newcrest Mining was able to save about 50.5% of its operating cash flow for business growth and to pay dividends. The current dividend of 15 cents produces a dividend yield of 0.80%.

Newcrest Mining is trading around AU$21.80 per share, up 25 cents or 1.14% from the previous trading day, with a market capitalization of AU$16.69 billion, a price-book (P/B) ratio of 2.24, a price-sales (P/S) ratio of 4.80 and a price-earnings (P/E) ratio of 54.49.

The average analyst target price is AU$17.24 per share, which ranges between a low of AU$10.13 and a high of AU$24. The recommendation rating is 3.1 out of 5.

Disclosure: I have no positions in any stocks mentioned in this article.

This article first appeared on GuruFocus.