While its inclusion in the ASX top 20 and a buoyant gold price since December have supported the Newcrest share price over the past few months, soft production numbers in the first half-year to December 2019 will need to be offset by a boost to its gold reserves for the share price to move materially higher from current price levels.

Overlay these challenges with the prospect of water restrictions impacting production levels at its major Australian gold mining operation, ‘Cardia” in NSW and uncertainty around its ability to re-engage with the PNG government, investors have a lot weighing on their mind in assessing the near-term direction of the company’s share price.      

The Cardia gold mine in NSW is being severely impacted by drought and may have to cut production if it cannot continue to access the 160 million litres of water a day that is consumed by the mine site. The significance of the problem is that Cardia is Newcrest’s largest cash generator in terms of gold production. Currently with water saving measures and the purchase of water licences, gold production can continue for the foreseeable future, however unless drought breaking rains fall in 2020, uninterrupted production beyond 2022 may be called into question.    

 However, diminishing ore reserves is the key strategic challenge currently facing the Group.

In its December 2019 Mineral Resource and Reserve estimate the company noted that its gold reserves had fallen by 2.2million ounces, representing a decline of approximately 4% of gold reserves, compared to its December 2018 estimate.

The gold miner is pursuing new mine sites in Red Chris and Havieron in a determined effort to reverse this ore depletion and while early results are promising, considerable high grade ore body discoveries are necessary to compensate for declining production from existing mines and to boost the share price over the medium term.

On a positive note the company last month re-financed $1.15 billion of existing debt with 10 year and 30 year notes at a fixed blended coupon rate of 3.7% pa, reflecting the strong investment grade credit quality of the offering. The strategic importance of the re-financing transaction is not just that the interest rate is measurably lower than its funding cost of existing debt, but it now aligns the company’s debt maturity profile with the remaining asset life of existing mine sites, reducing funding risk.  

In addition to this funding boost, Newcrest completed a $1 billion share placement at $25.60 a share to fund the US$460 million of Lundin Gold’s debt and streaming facilities, as well as future growth. This is being supported by a $100 million share purchase plan.

The market is yet to cast its vote as to whether a strong balance sheet and a historically high gold price is enough to offset struggling gold production levels arising from declining ore body grades and relatively short reserve lives.

But if history is any guide, absent rising production levels from long-life mines with high grade ore, share prices of resource stocks tend to under-perform the broader market.    

Kerry Daly