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Newcrest Mining Rises on Production Results

- By Alberto Abaterusso

Newcrest Mining Ltd. (NCM.AX) closed 0.48% higher at 25.13 Australian dollars ($17.71) per share on May 1 after the company released its production results for third-quarter 2019.

For the quarter ended March 31, gold production decreased 4.8% to 623,124 ounces and copper production declined 5.8% to 25,303 tons from the second quarter. The results were influenced by unplanned shutdowns during mineral treatment at Cadia in Australia and Lihir in Papua New Guinea, as well as by lower grades and volumes at Gosowong in Indonesia.

As a result of higher grades and throughput, production at Telfer in Australia increased, but not enough to offset the other declines. The all-in sustaining cost grew 2.5% sequentially to $738 an ounce as fixed costs were spread over a thinner base.

The gold margin advanced 9.3% to $563 per ounce thanks to 5.3% upside in the average gold price to $1,301 that the miner realized from the sale of one ounce of metal.

Total output for the first three quarters of fiscal 2019 improved from the prior-year period, marking 7% growth in gold production and 33% growth in copper production. The AISC per ounce was 12% lower at $744 per ounce.

Investors who may be interested in Newcrest Mining should be aware this stock is highly sensitive to changes in the price of gold. When the commodity averaged $1,304.24 per troy ounce on the London Bullion Market in the first quarter, reflecting a sequential 6.2% rise, the share price soared 17.5% on the Australian stock market, topping most of its direct competitors.

In comparison, the VanEck Vectors Gold Miners exchange-traded fund (GDX), a benchmark for the gold mining industry, gained only 4.3%.

The bullion is down trending. On April 30, the precious metal closed at $1,282.30 per troy ounce, down 2.86% from February, when the average price reached a 10-month high of $1,320.07.

Two macro factors could push gold prices above $1,300 again, which would make Newcrest Mining an appealing investment.

The first positive factor to gold is the Federal Reserve's dovish monetary policy as a plausible response to ongoing growth in the U.S. economy, which was up 3.2% in the first quarter of 2019 versus expectations of 2% growth.

The second positive factor is the Trump administration persisting with a low currency policy to boost U.S. exports.

Unchanged short-term interest rates for an extended period of time typically promote expectations for a low real yields environment, where gold is more appealing than bonds. Given the inverse relationship between the two securities, when the U.S. dollar trades lower, the bullion increases.

If gold starts to uptrend again, Newcrest Mining will benefit based on its production expectations for full fiscal 2019, which will end June 30. The company is guiding for gold production between 2.35 million and 2.6 million ounces and 100,000 to 110,000 tons of copper.

Wall Street issued a hold recommendation rating for shares of Newcrest Mining with an average target price of AU$24.17 per share, reflecting nearly 4% upside from the closing price on Tuesday.

The stock has a market capitalization of about AU$19.3 billion and a 52-week range of AU$18.58 to AU$26.54.

The stock doesn't appear to be cheap. The share price is now above the 200- and 100-day simple moving average lines and near the 50-day line.

The price-book ratio is 2.63 versus the industry median of 1.62 and the enterprise value to earnings before interest, taxes, depreciation and amortization ratio is 12.77 compared to the industry median of 8.71.

Disclosure: I have no positions in any securities mentioned.

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This article first appeared on GuruFocus.