World’s Best Mining Debt Defies Gold Woe in a VolcanoDavid Stringer and Benjamin Purvis
Newcrest Mining Ltd. bonds are delivering the best returns this year among metal producers even as the gold miner prepares for new writedowns at a floundering asset inside an extinct volcano.
Debt securities issued by Australia’s biggest gold producer returned 24 percent this year through July 25, compared with 15 percent for the world’s largest extractor Barrick Gold Corp., according to a Bank of America Merrill Lynch index of dollar notes sold by investment-grade miners. Falling costs have buoyed the company, which last week flagged a charge of as much as A$2.5 billion ($2.4 billion) mainly on its Lihir mine in Papua New Guinea.
While the writedown may raise Newcrest’s gearing by as much as 6 percent, the miner forecasts cash flow will stay positive after production costs fell 8 percent in the three months to June 30 and gold rose 3.4 percent. Output expenses have been helped by a decline in the Australian dollar, which averaged 10 U.S. cents less in the first half than it did in the same period a year earlier. For every one-cent drop in the Aussie, earnings before interest and tax are boosted by A$28 million, the Melbourne-based company said in February.
“Cost-cutting initiatives and the recent move in the Australian dollar have provided some relief,” Tariq Chotani, a credit strategist at Commonwealth Bank of Australia in Sydney, said in a July 24 interview. “The company’s plan to reduce capital expenditure has also been a credit positive overall.”
Action to cut jobs, trim exploration and crimp project budgets has lowered Newcrest’s all-in-sustaining costs, a measure that includes spending on production, administration, capital and exploration, to A$976 per ounce of gold in the 12 months through June, down 24 percent on the previous fiscal year, it said last week. The miner also exceeded a fiscal 2014 output target of 2.3 million ounces by nearly 100,000 ounces.
Newcrest’s bonds have outperformed larger peers, ranking top in the Bank of America Merrill Lynch gauge, which has returned 8.5 percent in 2014 as global yields have fallen and credit spreads narrowed. The company has two $750 million bonds outstanding, maturing in 2021 and 2022, and $500 million of debentures due in 2041, according to data compiled by Bloomberg.
“I think the bonds will continue to be relatively well supported,” Anthony Ip, a senior credit analyst at Deutsche Bank AG in Sydney, said in a July 25 interview. “They are quite attractive relative to their North American peers such as Newmont, Barrick and Goldcorp.”
While gold production costs fell in the fiscal year at four of Newcrest’s six operations, the 7 percent increase at Lihir has prompted an operational review, according to Chief Executive Officer Sandeep Biswas, who assumed control of the company this month, following a management overhaul.
“Where I’m focused is to get those costs down, and get the tons up, as Lihir has a lot of potential,” Biswas told reporters on a July 24 conference call.
Lihir, on Niolam Island, 900 kilometers (560 miles) north-east of Port Moresby, has been beset by unreliable performance and contributes little to cash flow or profitability, even though it accounts for about 55 percent of the company’s book value, UBS AG said in a report this month.
The mine was acquired in a $9 billion takeover in 2010 and is situated inside the Luise Caldera, a crater of an extinct volcano. It may contain a resource of 60 million ounces of gold and is among the world’s biggest deposits, according to stock exchange filings from Newcrest.
Gold was at $1,307 an ounce as of 9 a.m. in Sydney, having gained 8.8 percent since Dec. 31 after last year posting its steepest decline in a quarter of a century. The Australian dollar averaged 91.51 U.S. cents in the first six months of 2014, versus $1.0152 in the same period a year before. It was at 94.01 U.S. cents today.
Newcrest shares fell 0.7 percent to close at A$10.70 on July 25 and have declined 74 percent since the end of 2010, the year the producer completed its acquisition of Lihir.
“What more can you ask of a company than to minimize costs to maximize the ounces so as to maximize profits?” said Simon Mawhinney, a portfolio manager in Sydney at Allan Gray Australia Pty, which manages the equivalent of $3.8 billion, and made a small addition to its Newcrest share holdings last week. “You can’t ask them to do more than that, and they are doing it.”
Expected asset writedowns of between A$1.5 billion and A$2.5 billion after tax, mainly tied to Lihir as well as the Telfer Mine in Western Australia and Ivory Coast’s Bonikro, may increase gearing to more than 35 percent, according to UBS AG. Newcrest’s long-term aim is to cut gearing to less than 15 percent, according to a September filing.
“It will take longer for management to get to its gearing target, and as a result, we think that they will probably be more conservative in terms of dividends and the balance sheet for a longer period of time,” Deutsche Bank’s Ip said. “In that context, you could argue it’s a positive for bond holders.”