Newcrest Mining (ASX:NCM)

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Newcrest Mining Limited (ASX:NCM) is an international gold mining comany based in Melbourne, Australia. In terms of size it is Australia's third biggest overall miner, largest gold mining company and the world's 5th largest gold producer (before the merger with Lihir gold it was 8th). It is also a major copper producer. Originally known as Newmont, the company renamed in 1990 a year before it began expanding operations abroad, beginning with Indonesia (Halmahara Islands where its largest non Australian mine the Gosowong mine is located) and Chile. Since then it has expanded into Papua New Guinea after acquiring the Hidden Valley gold mine (the company's share of production was 18,785 ounces in the second quarter of 2010 up from 17,680 in the quarter prior)^[1][2][3] Lately much of the comany's growth has come from increased production, efficiency and lower costs at its telfer and gosowong properties. Cadia Valley remains a central focus of the company. Development of the Cadia East portion, estimated to cost US$1.77 billion will enable Cadia Valley production to reach 800,000 oz of gold and 100,000 tonnes of copper a year.^[4] The underground mine there will be Australia's biggest and have a mining life of potentially 30 years. The project isn't set to begin production until 2013. In the second quarter of 2010 overall cash costs per ounce were $366.^[5] Total cash costs were A$493 for the year ended June 30, 2011 and A$542 for the quarter ended June 30, 2011.^[6] In August 2010 Newcrest Mining received takeover approval for Australia's 2nd largest gold mining company Lihir Gold from 2 key sources; Lihir shareholders and the national court of Papua New Guinea. The deal valued at US$9.5 billion gives Lihir Gold shareholders 0.12 of Newcrest Mining's shares and AUS$0.225 more for each Lihir Gold share. 2011 FY at the half Newcrest has available A$1.1 billion as a bilateral loan facility. For the 2011 fiscal first half Lihir was largely responsible for the 70% increase in Newcrests total gold production (up to 1.397002 million ounces). Gold sales were 1.208 million ounces or 86.5% of gold production, copper sales totalled 37,000 tonnes down 5,000 tonnes (11.9%).^[7]

The company's total assets were valued at $6333.8 million at the end of the 2010 fiscal year (current up 30.44% to $1410.5 million), up 12.8% from $5616 million at the end of 2009 (current $1081.3 million). Total liabilities in 2010 were 1324.3 million (up slightly 5.3% from $1257.6 million in 2009). 2010 total equity was up 14.94% $5009.5 million (from $4358.4 million in 2009).^[8]

Only since the June to September 2010 period (beginning of 2011 fiscal year) has Lihir Gold production and revenue been part of Newcrest's business.

Company Overview

The company has 4 operating and 1 development mines in Australia. In addiction it has a controlling interest in 2 other mines, one in Indonesia and another in Papua New Guinea.

• The Telfer property is located 1,900 km from Perth. In includes 2 mines. main and west dome are open pit and there's an underground mine. From 1977-2000 the area produced 6 million ounces of gold but was closed from 2000 to 2002 because of cyanide copper contamination.

During the 2nd half of 2009 EBITDA increased by 105 % while production increased 15 % and sales costs were lower.

• Cadian-Ridgeway property is made up of the ridgeway mine (open pit) and cadia hill mine (underground). The area is located about 20 km from Orange in central west New South Wales.

• The 'Ridgeway mine is one of 3 Newcrest mines that produces both gold and copper. Reserves are at 11.8 Mt for gold and 80 Kt of copper of copper about 25-50 % lower than resource estimates.^[9]

2009 production was at about 220,000 ounces of gold and 29 Kt.

• The Cadia Hill mine which holds major deposits of copper and gold, is currently undergoing expansion.

Cadia Hill Reserves : 33.2 M oz of gold and 6.59 Mt of copper. The mine has the lowest cash costs of all newcrests operations, It produces at a cost of $232 per ounce. Construction of the newest portion, Cadia East Australia's largest underground mine began the last week of July 2010. About 10 times as much as its Ridgeway counterpart, over 800 million tonnes of rock will eventually be extracted.^[10]

• Cracow Mine is 500 km NW of Brisbane. Although production has been steady since 2006 mining costs (especially total costs) have risen by at least 51 % over the last 2 years. The mine life is expected to end in 2014 but new development is possible given that additional exploration has yielded gold discoveries in excess of 10g/t.^[11]

• Gold and silver mine in Gosowong, Indonesia is joint ventured with Pt Nusa Halmahera Minerals.

Production

2011 full year production is estimated to be 2.85 to 2.95 million ounces for gold. 2011HFY1 - Bonikro's gold resource increased to 2.0 million from 1.2 million ounces. EBITDA (1092M) came from Cadia Valley (267M up 16.1%), Lihir (257M), Telfer (267M up 39.8%), Gosowong (230M up 55.4%), the other 6.5% spread between Hidden Valley, Bonikro, Mt Rawdon and Cracow. For the 2011 fiscal first half Lihir was largely responsible for the 70% increase in Newcrests total gold production (up to 1.397002 million ounces). 8% of the increase came from production at Newcrest's original locations (not including Lihir Gold's assets)^[7]

Table information doesn't include Lihir Gold until 2011 (quarter ended September 2010).

Mid 2010 (fiscal year) quarterly results posted a 9% increase in production and 9% decrease in cash costs as well as first production at hidden valley. Production rose primarily at telfer, gosowong, and cracow (31 %). The period ending 2009 saw record production, lower cash costs, and a higher gold grade at telfer resulting in a 17 % increase in total production over the previous quarter. Copper and gold recovery remained steady at around 87%.^[12][13]

Financial results

Quarter ended June 30, 2011 - Total cash costs were A$493 for the year ended and A$542 for the quarter.

2011 First Half Results - For the half ended December 31, 2010 sales revenue was 65.5% higher than the corresponding period in 2009 (up AUS$778 million) about half of the increase due to the addition of Lihir Gold (without Lihir Gold revenue increased 27.2% or $323 million) . Operating cash flow almost doubled, up 92.2% to AUS$922.1 million (was still up 49.6% without including Lihir Gold's contributions). EBITDA margin rose 6 basis points (from 46 to 52%) while EBIT rose 5 bp (35 to 40%). Without including Lihir, mine production costs (which make up 3/4 of total cost of sales) increased 2.5% (production costs for Lihir alone totalled $262.5 million; even with Lihir's costs royalties were only up 16%. Of the new company's combined depreciation costs Lihir made up 21.5% ($51.8 million; combined was $241 million). Deferred mining and inventory adjustments were in the negative entirely due to Lihir's participation (overall cost Newcrest $61 million, without Lihir costs were reduced by $36 million). Projects were the destination of 84% of capex down from 87.5% in 1hfy10. Exploration expense (up from 51 to 62M) went 47% to province development (same as the year before), 30.6% to Brownfields and 22.6% to Greenfields. A$32 million of total company profit was a direct result of higher gold prices while another A$10 million was from higher realized average copper price. Foreign exchange rates and high oil prices reduced profit by A$37 million and A$2 million respectively. Pre merger cash flow rose 50%.^[7] The A$62 million in capex went to Australia (36%), PNG (33%), Indonesia (17%), Cote d’ Ivoire (12%, wasn't include before the Lihir merger) and Fiji (2%). Increased/organic growth in sales only accounted for only 11% of the increase in total revenue.

The 2008-2009 period saw total costs decrease by 16 % mainly due to deferred mining, inventory adjustments and changes in telfer gas costs. Operational cash flow rose on higher gold price and lower FX rate. Most of the increased earning came from telfer where EBITDA went from about a third as much as that of cadia in 2008 to 83 %.^[20]

Sales of gold account for 85.4% of revenue (2011 first half) up from 75.9% of revenue before the Lihir Gold takeover (the rest is from copper).^[7]

Merger talks with Lihir Gold

On April 1, 2010 the company announced that it was in talks with Australia's second largest gold miner Lihir gold to acquire it in a scrip and cash transaction. The proposed deal would give Lihir shareholder's 35% ownership of the new company. Lihir has criticised the deal and talks are still ongoing. Gold production by the combined company would account for about 3% of world gold supply. The top 3 shareholder of both companies are the same.^[23]. For the 2011 fiscal first half Lihir was largely responsible for the 70% increase in Newcrests total gold production (up to 1.397002 million ounces).^[7]

Lihir Gold Key Data

Since the merger with Newcrest, for FY2011 Lihir is on track to produce upwards of 865,000 ounces of gold at a total site cash cost of between A$380 and A$410 million (total site cash cost is about 4-5 time higher than at Bonikro (65-75,000 oz/yr) and Mt. Rawdon (85-95,000 oz/yr).^[7]

References

1. ↑ Production (2010-07-22).
2. ↑ Newcrest cuts Hidden Valley production forecast, output falls (2010-04-22).
3. ↑ Newcrest gold output gains 32 % on record production at telfer, gosowong (2010-07-21).
4. ↑ Newcrest Mining to move ahead with $1.8 billion Cadia East gold-copper mine development (2010-04-12).
5. ↑ Newcrest output climbs in June quarter (2010-07-21).
6. ↑ Newcrest Mining 2011 June Quarterly Report (2011).
7. ↑ ^{7.0 7.1 7.2 7.3 7.4 7.5 7.6} Newcrest Mining 2011 First Half Results (fiscal year began June 2010) (2011-02-11).
8. ↑ Newcrest Mining Annual Report 2010 page 60
9. ↑ Ridgeway Gold and Copper Mine Cadia Valley, New South Wales, Australia. Retrieved on 2010-07-28.
10. ↑ Work begins on Australia's largest underground mine (2010-07-27).
11. ↑ ^{11.0 11.1} "Cracow operations"
12. ↑ December quarterly report (2010-01-28).
13. ↑ June 2009 quarterly result (June 2009).
14. ↑ "Telfair operations"
15. ↑ "Cadia Hill operations"
16. ↑ "Operations"
17. ↑ "Gosowong operations"
18. ↑ Financial Results Twelve months ending 30 June 2010
19. ↑ Newcrest Mining Ltd consolidated earnings results (02/11/2011)
20. ↑ Half year financial results 2009 (December 2009).
21. ↑ 2009 Annual Report
22. ↑ 2010 Second Quarter Production Report
23. ↑ Lihir Gold says Newcrest's $8.5 billion bid not enough (2010-04-01).