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Increase Newcrest Mining as the Share Price Falls

- By Alberto Abaterusso

It is quite unusual for gold mining companies to distribute part of their free cash flow to shareholders in the form of dividends. And when it happens it is one more reason to have a look at that company.

This is the case of Newcrest Mining Ltd. (NCM.AX). It is one of the few in the mining industry paying a dividend. The Australian gold and copper mining company with assets in Oceania, Indonesia and Africa is distributing a cash six-month dividend of nearly 11 U.S. cents. This means that according to a share price of about $14.15 at close Monday, Oct. 8. on the Australian Stock Exchange, the forward dividend yield is about 1.6%.


The forward yield is below the yield of 1.8% on the S&P 500 Index. But investors should not lose sight of Newcrest Mining Ltd. and wait for the propitious moment before acquiring shares. The right moment is following a significant weakness in the share price.

The odds that Newcrest Mining will beat the S&P 500 Index on the dividend yield is high for several reasons, particularly based on two pieces of information.

First, the board of directors will likely authorize the payment of an annual dividend of no less than 22 U.S. cents per share in fiscal 2019. That is supported by an improved balance sheet and a disciplined allocation of financial resources on mineral projects. Readers should know that the company's fiscal year is July 1 to June 30.

An improved balance sheet is indicated by a 31% reduction in the net debt position of the company to $1 billion at June 30, 2018. As a result, the total debt to equity is 26.95% compared to an industry median of 86.71%, and the trailing 12-month interest coverage ratio is 3.93. The last value is not only above the industry median of 0.47 but also above the threshold of 1.5 that investors usually expect to see in a stock with good long-term fundamentals.

The strengthening of the balance sheet has been possible thanks to a portfolio of highly productive assets. Without that, it wouldn't be possible for Newcrest Mining to deliver a trailing 12-month Ebitda margin of 43% versus an industry median of 23%. Gold has been supportive during the company's fiscal year.

Newcrest Mining has also demonstrated that it is relentless in minimizing workers' injuries as much as possible during mining. In fiscal 2018, the miner reported zero fatalities or life-changing injuries and a nearly 30% decline in the total recordable injury frequency rate. This aspect is also helping the company in lowering the all-in sustain costs, increasing the profit margin per ounce of metal sold and generating positive free cash flow.

Newcrest Mining billed customers for $3.56 billion in full fiscal 2018, which was a 2.3% increase year over year. If from that annual turnover it could squeeze operating cash flow of $1.43 billion and levered free cash flow of $881.75 million, shareholders be sure of another fruitful year for fiscal 2019 in terms of dividends paid.

Because of an 11.4% expected growth in total revenues to $3.97 billion, investors should be confident about the payment of the annual dividend, although gold is predicted to stay in a range of $1,185 and $1,215 per ounce and not reach the current year's high of $1,380 until 2019, according to Kitco.com. The predicted range is about 6.3-8.6% lower than the average gold price of $1,296.96 per troy ounce for the period from July 1, 2017, to June 30, 2018.

A lower price of gold may create a more convenient entry point for investors. One hopes that the precious metal may push the share price of Newcrest Mining far below the 52-week low of $13.41. This could mimic what happened in November and December 2016: Newcrest Mining hit a new low of $12.50 per share while gold was ranging between $1,150 to $1,250 per troy ounce.

The stock is already inexpensive. The share price at close Oct. 8 is below the 200-, 100- and 50-day simple moving average lines. That is the result of a nearly 10% decline for the 52 weeks through Oct. 8.

Further indications of a not expensive stock also stem from a 52-week range of $13.41 to $17.53 and from a price-book ratio of 1.5 versus an industry median of 1.74. Also, the EV-to-Ebitda is not very high at 10.49 versus an industry median of 9.3.

Yet I would wait for a significant depreciation before increasing a position in Newcrest Mining.

The recommendation rating for the company is 2.7 out of 5. As of September 2018, five analysts out of 16 were for a buying the stock, five were suggesting holding it, five were predicting it would underperform and another analyst recommended selling.

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

This article first appeared on GuruFocus.


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