Newcrest Mining Stock: Entering the Low Risk Buy Zone (OTCMKTS: NCMGF)

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It’s been a tough start to the year for the Gold Miners Index (GDX), and Newcrest (OTCPK:NCMGF) hasn’t been spared, despite having a much better year from a margin perspective. This was helped by the price of copper, which until recently went against the price of gold, giving Newcrest margins (by-product credits) a good boost. However, real margin expansion comes later this decade, and Newcrest has the path to become a primarily Tier 1 jurisdiction producer with $1,000/oz plus AISC margins. Given this unique position, I consider the stock a buy at AU$19.75.

All figures are in US dollars unless otherwise specified. Newcrest (NCM.ASX) trades high daily volume on the Australian Stock Exchange, but limited volume on the OTC market. Therefore, the best way to trade the stock is on the Australian Stock Exchange, and there is significant risk in buying OTC due to the wide bid/ask spreads, low liquidity and lack of collateral. future liquidity.

Red Chris mine

Red Chris mine (Company presentation)

Newcrest Mining Third Quarter Results (CYQ1)

Newcrest released its fiscal Q3 (calendar year Q1) results in late April, reporting quarterly gold production of around 479,800 ounces and 31,000 tonnes of copper. The good quarter was helped by a strong increase in production at Cadia, which has seen its production increase now that the SAG mill engine is back in full operation (the fiscal Q2 replacement upgrade impacted on production). The company also saw its first contribution from the high-grade Brucejack mine in British Columbia (acquired through its acquisition of Pretium), which produced approximately 17,000 ounces in the three weeks following the closing of the transaction. Finally, Lihir had a better quarter, benefiting from improved grades/recovery rates.

Newcrest - Quarterly Production by Mine

Newcrest – Quarterly Production by Mine (Company documents, author’s table)

This production increase has pushed year-to-date production to ~1.31 million ounces, with the company confident that it can meet its updated FY2022 guidance of around 1.92 to ~2.02 million ounces of gold. Meanwhile, from a cost perspective, we saw significant improvement, helped by higher by-product credits, with the copper price improving to ~$10,000/ton from ~$9,600/ ton in fiscal Q2 and ~$8,500/tonne in fiscal Q3 2021 This improved margins from fiscal Q2 levels, with an all-in sustaining cost [AISC] margins increased to $809/oz from $588/oz. On a yearly basis, margins declined slightly, due to the high cost quarter at Lihir (Fiscal Q3 2022: $1,533/oz).

Newcrest - Quarterly All-In Sustaining Cost Margins

Newcrest – Quarterly All-In Sustaining Cost Margins (Company documents, author’s table)

The good news is that the Australian dollar continues to weaken against the US dollar, which should be a slight tailwind for the company heading into fiscal 2023 (July 1, 2022 to end of June 2023) . The same goes for the Canadian dollar, which will also help its Brucejack and Red Chris operations. So while Newcrest isn’t getting as much help from the price of copper from a by-product credit perspective while below $3.80/lb nor from the price of gold after its recent slump , it receives a bit of help from a currency standpoint. Putting all of this together, combined with the addition of a lower cost operation (Brucejack), I would expect to see costs decline year over year despite inflationary pressures (FY2023 vs. 2022 financial year).

Australian dollar against US dollar

Australian dollar against US dollar (TC2000.com)

Long term potential

In terms of Newcrest’s long-term potential, the company may not have industry-leading production growth, but the company could make up for that with significant margin expansion. Indeed, the company could consider increasing throughput at Brucejack closer to the 5,000 tonnes per day mark, making it a lower cost operation with a production profile of nearly 450,000 ounces per year (Pretium was operating at less than 400,000 ounces). Additionally, the company’s Red Chris Block Cave [RCBC] which is expected to come online later this decade, is expected to have negative all-in sustaining costs, assuming a copper price of $3.50/lb or higher. Finally, Havieron should help reduce costs at Telfer.

Newcrest - Long Term Cost Outlook

Newcrest – Long Term Cost Outlook (Company presentation)

The combination of negative AISC at Red Chris, a larger production profile at Brucejack and lower costs at Havieron could push Newcrest’s consolidated costs below $650/oz by FY28. the company’s recent presentation, it seems to believe it can get costs below $550/oz, which would be a very impressive feat, putting its costs more than 50% below the industry average. There is certainly a path to achieve this if copper prices remain high, and it can turn Brucejack into an ultra high margin trade from a high margin trade. However, the key will be to reduce costs at Lihir, which accounts for approximately 35% of production and has costs above the industry average (last 12 months costs: ~$1,400/oz).

Even if we take a more cautious view and assume the company misses its long-term outlook of costs below $550/oz and comes in at $700/oz, Newcrest would still be the world’s cheapest gold producer in the world. million ounce producer. space. This would allow the company to benefit from a higher multiple than its peers, given that it could easily withstand any down cycle in the gold market and enjoy phenomenal margins. Therefore, whether the company sticks to its ambitious long-term projected cost profile (costs around $550/oz) or not, Newcrest has a very bright future.

The only real negative value hurting its premium valuation is that over 30% of production comes from a Tier 3 rated jurisdiction (Papua New Guinea), where we saw the Porgera Special Mining Lease [SML] not immediately extended into 2020. This has since been resolved, but the profit-sharing agreement fell in favor of PNG shareholders (53/47), a downgrade from previous terms. The good news is that Lihir’s SML was granted in 1995 for 40 years, so it doesn’t mature until 2035, giving investors plenty of leeway to avoid negotiations similar to what BNL went through. in Porgera last year. Let’s take a look at Newcrest’s review below:

Evaluation and technical image

Based on around 895 million shares and a share price of $13.20, Newcrest trades at a market capitalization of around $11.8 billion, a very cheap valuation for a producer of over 2.0 million ounces with a trajectory to costs below $850/oz by 2025. If we compare this figure with Newcrest’s estimated net asset value of approximately $13.0 billion, Newcrest is trading at a rare discount to NAV, and the last time the stock traded low was in March 2020. It turned out to be a great buying opportunity for the stock, with an increase of over 90% over the next six months. Clearly, this was helped by a surge in the price of gold, which suggests there is no guarantee of a repeat performance of this magnitude. Still, from a risk perspective, Newcrest has a very attractive price here.

Graphique quotidien de Newcrest (<a href=

Newcrest Daily Chart (ASX) (TradingView.com)

Moving on to the technical picture, Newcrest has strong support at AU$19.00, within 4% of support levels. Meanwhile, its next resistance level comes in just at AU$22.80, indicating a potential upside of 16% from current levels before it encounters significant resistance. This translates to a reward/risk ratio of 4.0 to 1.0, currently leaving Newcrest in a low risk buy zone. Assume gold and copper prices continue to weaken. In this case, we could see a sequential compression of Newcrest’s margins, especially with a favorable quarter for by-product credits (copper).

Still, with a path to an AISC below $850/oz aided by a leaner, meaner trade at Brucejack, I wouldn’t worry too much about fiscal Q1 2023 and be more focused on the long-term potential here of key projects like RCBC, Havieron and the growth of Brucejack. Therefore, I consider this Newcrest pullback to AU$19.75 a low risk area to start a position in the stock if I traded in the Australian market. However, since I don’t trade on the ASX, I continue to favor Agnico Eagle Mines (AEM), another high-margin producer with a similar valuation but much better liquidity from a trading standpoint (US market /canadian).

Summary

Newcrest may not stand out among its peers from a growth perspective, given that the acquisition of Brucejack will simply put it on track to return to FY19 production levels once optimized (~2. 49 million ounces of gold). Still, the margin profile is one of the best industry-wide Newcrest can offer, although investors will need to be patient given that the bulk of this margin expansion will be from RCBC, an opportunity post-2026. Therefore, for bullish gold and copper patient investors, I see Newcrest as a long at AU$19.75.

Martin E. Berry