Newcrest Mining is trading at record highs. It has nearly doubled in price since March, rallying from $5.60 to $11.80.
Price movement
Newcrest Mining is trading at record highs. It has nearly doubled in price since March, rallying from $5.60 to $11.80. As a gold producer its price is driven by gold bullion's price fluctuations, which have recently eclipsed the Iraq war high in February. The bullion price is in a long-term trend upwards. We reviewed Newcrest last year as a growth stock, so it is timely to review its progress after the price rise.
Current details
The weak US dollar's effect on bullion and Newcrest's Telfer mine expansion are combining to drive its share price. Its net profit for the full year was $92 million, with increased production and lower costs pushing underlying profit growth. The revaluation of its US dollar debt and hedging arrangements also helped the result.
The Telfer deposit is being mined and developed, with gold production due to commence in September 2004. Telfer's resource stands at 510 tonnes. Newcrest presently produces about 22 tonnes a year; when Telfer is established it will contribute more than another 28 tonnes.
Ongoing group exploration is still increasing its reserves, which stand at 794 tonnes. Management has targeted a 1134-tonne objective in the next three years.
Net profit projections for the next three years are $110 million (a price-to-earnings ratio of 33), $240 million (P/E 17) and $274 million (P/E 14). Because of its hedged production, a $US10 increase in gold translates into only a 5 per cent increase in earnings. But earnings will drop 10 per cent if the Australian dollar rises by 5 cents.
Sector
The Australian gold sector has been decimated by corporate takeovers over the past few years, with major producers now under foreign control. Newcrest stands out because of its size and growth profile as a suitable institutional-sized stock. Lihir Gold, the other major listed producer, offers slower growth but is not as popular due to a perceived risk, as its mines are based in Papua New Guinea.
Oxiana Limited is the third-largest listed gold producer; it too is undertaking a major production expansion, in Laos. Again, perceived risk has dissuaded investors.
Worth buying?
It's a "damned if you do, damned if you don't" situation, with a high possibility of a drop of $1 to $2 in the share price if the price of bullion drops suddenly. Newcrest Mining is a growth stock. Buy now, and if the share price drops, buy more.
Geoffrey Hill presents ABC NewsRadio's daily afternoon finance report and is an independent private client adviser. Visit www.ghill.com.au
