Newcrest Mining: Cadia’s slow return hits sentiment

About the author:

Mat Collings
Author name:
By Mat Collings
Job title:
Research Analyst
Date posted:
31 January 2022, 8:00 AM
Sectors Covered:
Mining

  • Q2 reporting of 436koz was 7% below consensus, with Lihir production hit by heavy rainfall and planned maintenance at Cadia running further into the quarter than we anticipated.
  • Newcrest Mining (ASX:NCM) has maintained group guidance for FY22 but is pointing towards Lihir only achieving the bottom end of range.
  • Today’s sell down appears overdone, especially given the known “one off” nature of Cadia’s result.
  • We move our price target to (login to view) on softer FY22 production outlook and maintain an Add rating.

Event

Q2 gold production came in 7% below consensus expectations at 436koz of gold, plus 26.4kt of copper, driven by below-forecast output from Cadia and Lihir.

Analysis

While NCM’s gold production lifted QoQ it came in below market expectations. Cadia, in particular, did not lift to the extent we anticipated, with the offline SAG mill not resuming full production until December.

Heavy rain at Lihir in PNG limited the ability to access high grade ore, while the FY22 outlook for the operation has been moved towards the bottom end of the 700-800koz gold production NCM guided. Covid-19 related costs are expected to last through the year.

The market appears to have overreacted to the miss by NCM. The impact of Cadia’s softer quarter is pronounced – both on gold production and headline costs given its strong copper credits.

This should quickly normalise in the second half of the year, however, and costs could even improve beyond prior quarters as the moly plant ramps up.

Forecast and valuation update

We revise FY22 production using Q2 results and the updated guidance on Lihir.

Our copper price deck has had minor updates, along with revisions to some long-term cost estimates for NCM. The combined impact of these changes on financial forecasts is presented on page 4.

The 12-month price target, based on our sum of the parts NPV valuation, reduces to (login to view) and we maintain an Add rating for the stock.

Investment view

NCM is well placed to perform going forward. Like the other ASX gold majors, it is in a period of significant capital investment, but NCM’s focus is on driving down operating costs while maintaining metal production near current levels (boosted in the near term by the proposed Brucejack acquisition offsetting Telfer’s decline). 

Given a portfolio of large, long-life mines with geographic spread across Australia, Canada and PNG, and the potential for further growth or extension from current technical studies, NCM offers good gold and copper price exposure along with upside potential from studies due during CY22.

Price catalysts

Cadia operations returning to long term production and cost trends following the major maintenance shut down.

Gold and copper price movements in a potentially higher global inflation environment.

Risks

The performance of Lihir in H2 will need to be closely watched, with any underperformance having the potential to further damage investor confidence.

Failure to gain regulatory approval for the Pretium acquisition from Canadian regulators / courts would cut our production estimates.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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