Newcrest Mining ((NCM)) is advancing its options, approving the expansion of Cadia stage 2 (NSW) while upgrading recoveries at Lihir (PNG). These are key assets and brokers believe both developments should be positive for long-term production.
Capital expenditure at Cadia has decreased by -US$5m to US$175m and delivery on stage 2 is expected in late FY22 with estimated average production of 34mtpa from FY23, considered by both Morgan Stanley and Ord Minnett to be on the conservative side.
While the news has minimal impact on valuation, Ord Minnett suggests it is a reminder of the options that exist within these two assets. Cadia is now they flagship asset and the broker now models 2-3% higher gold production and about 1% improvement to copper production.
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Citi takes the opportunity to mark to market for its gold deck and, while retaining a $37 target, upgrades to Buy from Neutral, given the pullback in the stock and the fact Newcrest has underperformed the ASX gold index by -15% over the last six months.
The installation of flash flotation and additional cyclone capacity should lift gold recovery 1.2% at Lihir, at a capital cost of US$61m with a 32% internal rate of return. Morgan Stanley asserts the long mine life of Lihir makes ongoing recovery improvements particularly valuable.
The project should add an additional 244,000 ounces of incremental gold production over the life of the mine. Still, following a poor operating performance in FY20, steady production over the next year remains to be seen, Ord Minnett asserts.
Citi lifts longer-term recovery estimates to 81.2% from FY23, believing the project addresses an important issue by ensuring additional gold has recovered and less goes to tailings.
A maiden resource at Havieron (Western Australia) is expected in the current quarter ahead of the commencement of an exploration decline and a pre-feasibility study late in 2021. Drilling updates are pointing to a larger orebody with increased potential for a bulk mining scenario, Ord Minnett points out.
An exploration decline is expected to start late in 2020 before a resource update at Red Chris in the third quarter of FY21. While the Red Chris (Canada) is long-dated, Ord Minnett models a 12mtpa scenario based on filling the current mill and infrastructure, but with a 1.8bnt resource suspects this is already conservative.
Citi also notes Newcrest will list on the Toronto Stock Exchange from October 13. There is no equity issue in conjunction with the secondary listing so the broker suspects liquidity could be difficult. Citi is not completely convinced of the benefits as the TSX is a crowded marketplace for gold stocks.
Moreover, North American resource funds have no problem investing on offshore exchanges, although the listing makes for easier issue of scrip for any future North American acquisitions. Newcrest Mining was listed on TSX during 2012-13 and the main impetus now is ownership of the Red Chris mine.
There are five Buy ratings and two Hold on FNArena’s database. The consensus target is $36.09, signalling 12.6% upside to the last share price.
See also, Lihir Aside, Solid Outlook For Newcrest Mining on August 18, 2020.