Newcrest (NCM) made investors sit up and take notice with its March quarterly production report yesterday with an unusual focus on its most important asset, the huge Cadia mine in NSW’s midwest.
The mine was hit by a small earthquake on Good Friday which has stopped production for the next four to five months, at least.
But on top of that Newcrest revealed that rising electricity prices will see power costs at the mine almost double next year. The quake damage means production for 2016-17 for the mine and the company, especially of gold, remains uncertain (and possibly for 2017-18 if the delays continue early in the new financial year).
And with the sharp rise in power costs, profits and cash flows from the mine will be hit hard in 2017-18.
Despite that the shares only dipped 1.7% to $22.03.
The power contract renewal cost shock was the big news for investors, coming on top of the delays caused by the earthquake which is now put at 4.3 on the Richter scale.
Cadia delivered more than 70% of Newcrest’s pre tax earnings in 2015-16, but the combination of damage from the quake, or as Newcrest describes it ‘seismic event’ and the power price surge looks set to crimp those earnings in the near future.
The market has been awaiting a fresh update on the Cadia damage, particularly in the two underground panel caves where the mining takes place.
The larger and more important of the caves, Panel Cave 2, has suffered only minor damage, and Newcrest says it should resume operations in the early months of the 2018 financial year.
But Newcrest was unable to say when Panel Cave 1 would be able to resume.
Newcrest is considering restarting the nearby Ridgway mine to allow processing of ore on the surface to continue.
But for now the mine remains under a prohibition notice from NSW mine safety regulators.
But despite the seismic interruptions at Cadia and rain-related disruptions at WA’s Telfer mine in the March quarter, Newcrest has maintained its gold production guidance for fiscal 2017.
But the miner expects to be close to the bottom end of that guidance range. Gold production for the quarter was 599,000, down 2.6% from the prior quarter. Copper production fell 12% to 22,000 tonnes.
The power price shock at Cadia was less expected, but comes as many miners and industrial companies in Australia contemplate the impact of soaring power (and gas) prices and reduced security of power supply.
“Newcrest has recently finalised an updated electricity supply contract for the full 2018 financial year at a base price (excluding regulated charges) 90 per cent higher than is currently being paid in 2017," said Newcrest in yesterday’s statement. The gold miner said the actual impact on Cadia’s cost of production would depend on output and energy consumption, but if the mine were operating at full capacity the impact would be up to $US45 per ounce.