Glenda Korporal | The Australian
NEWCREST chief executive Greg Robinson has had the dubious distinction of seeing the share price of his company halve since he took over in July 2011.
When he succeeded Ian Smith, the shares in Australia’s largest goldmining company and one of the world’s largest goldminers were approaching $40.
Now, long-suffering Newcrest investors have the rest of the Easter break to decide whether they might regard Thursday’s closing price of just over $20 as one of those “buy on weakness” events or a sign to further exit the company’s shares following the latest piece of disappointing news.
It was only last month that Robinson, on releasing the company’s half yearly results, was assuring investors he was hopeful the company would meet the lower end of its production guidance range of 2.3 million to 2.5 million ounces of gold.
This followed confirmation that the company’s interim profit for the six months to December was only $320 million – almost half the $611m it reported in the six months to December 2011 — on the back of lower sales and lower gold prices.
But the company’s share price rose at the time on words of comfort from management that the current half would be better.
On Thursday, shareholders learned that Robinson was downgrading the company’s production guidance to two million to 2.15 million ounces, mostly because of production issues at its Lihir goldmine in Papua New Guinea.
They reacted badly to the news, wiping off almost $1.4 billion of its sharemarket capitalisation – yet more disappointing news for the company and yet another profit downgrade from a leading Australian Securities Exchange-listed mining company.
A cynic might say this was further bad news from a company that had been a serial disappointer for investors and yet another reason to get out of gold shares altogether.
The immediate reaction by some analysts has been a little more benign.
Morgan Stanley noted that “a downgrade was somewhat expected . . . but the magnitude was greater than we expected. However, key growth projects are on track for significant growth in financial year 2014.”
Credit Suisse estimated that the production downgrade was expected to reduce Newcrest’s net profit after tax for the current financial year by 20 per cent, or $177m, to $716m.
It described the latest issue as “disappointing as it is a new problem with the old plant”.
But it argued that Newcrest’s guidance on Lihir now appeared to be conservative and “from an investor point of view, the issue should not be overstated”.
The latest downgrade has served to highlight again the fact Newcrest, under Smith, overpaid for Lihir in 2010 when it spent $9.5bn buying the operation.
As Morningstar noted in its analysis of the problem, “the Lihir acquisition decimated Newcrest’s returns on capital and sees the company without a moat”.
“Such was the extent that Newcrest overpaid that it’s unlikely returns on invested capital will improve to acceptable levels in the forseeable future,” it said.
But it noted that “the underlying assets remain of reasonable quality and we believe it is unlikely management will repeat the Lihir mistake”.
Mining is always a risky business – just ask former Rio Tinto chief executive Tom Albanese – but the issues also highlight the difficulty of doing business in PNG.
The country has some of the richest mining deposits on earth and its citizens should be among the better-off people in the world, but for foreign companies operating there it has presented many difficulties.
There are always the memories of the old Bougainville Copper, which operated the world’s largest open-cut mine, producing copper, gold and silver, before it was closed after a long-running dispute between landowners and investors back in 1989.
At its height in the 1970s and 80s, the company’s tax payments made up 20 per cent of PNG’s national budget.
Earlier this year, well-respected economist Ross Garnaut was forced to quit his role as chairman of Ok Tedi Mining, PNG’s biggest earning company, after he was barred from entering the country by the political leaders in Port Moresby.
In Newcrest’s case the issues with Lihir relate to production rather than politics.
And Lihir offers Newcrest large, low-cost gold deposit, much more economical than its operations in Australia.
Newcrest’s operations are focused on the Asia-Pacific region, with Australia and PNG accounting for 40 per cent each, and Indonesia and Ivory Coast in West Africa making up the rest.
If Newcrest can get its production from Lihir on track, it will put the company back on a growth path and help reduce its operational costs.
But the question for shareholders, with the price of gold coming off its peaks, is: how patient are they prepared to be?
As Morningstar says: “Returning to an exploration and development focus rather than acquisitions is correct but the arduous delay between initial discovery and first production means that it will take years to improve returns.”