Newcrest’s FY15 performance is one of the shining lights in what has been a very challenging period for the commodities sector. The result is highlighted by the significant increase in free cash flow, up $953m to $1.1bn, as well as associated reductions in net debt and financial leverage
Newcrest has adopted a relatively conservative position by not paying a dividend despite the very strong free cash flow generation, which is positive for bondholders. Newcrest expects to apply further debt reduction to achieve its target gearing level (outlined below) through free cash flow, and does not foresee the need to raise equity. The company will consider returning to a dividend once further debt is reduced; however it has demonstrated that debt reduction and maintaining an investment grade credit rating remain a priority over paying dividends to shareholders.
The strong free cash flow performance enabled Newcrest to repay US$760 million of debt and for cash on hand to increase by US$65m in FY15. When translated to Australian dollars, the US$819m reduction in Newcrest’s US dollar denominated net debt translated to a reduction of only A$174m as a result of the depreciation in the Australian dollar. However, given the company’s commodity based revenues are fully generated in US dollars, Newcrest’s US dollar earnings base provided a natural hedge to its debt obligations.
Newcrest’s FY15 all in sustaining cost of production of US$789 per ounce is still cash flow positive by a meaningful margin even with the recent falls experienced in the gold price. Newcrest remains well positioned to withstand a continued weakness in the gold price.
- Increases in gold (1%) and copper (12%) production to 2.423m ounces and 96.8 thousand ounces respectively, with FY16 guidance on gold production increased to 2.4m – 2.6m ounces
- Free cash up $953m to $1.1bn, partly as a result of positive operating margins and a 33% ($279m) reduction in capital expenditure over FY15
- A 12% improvement in all-in sustaining cost to US$789/ounce (FY14: US$897 per ounce). As a result, the all in sustaining cost margin improved 13% to US$447 per ounce (FY14: US$395 per ounce)
- The Lihir mine, which has been a problem for Newcrest in recent years, was able to generate to increase free cash flows to $154m in FY15 (FY14: $51m) despite a 5% decrease in production
- Improvement in net debt to EBITDA ratio of 2.2 times (FY14: 2.6 times) with a target ratio of below 2.0 times
- Improvement in gearing of 29.3% (FY14: 33.8%) with a target gearing level of less than 25%
- Strong interest coverage (measured by the ratio of EBITDA to net finance costs) which has improved to 10.5 times (FY14: 9.7 times)
- Net debt position of US$2.9bn (A$3.8bn) fell by 22% over the course of FY15, with further debt reductions flagged over FY16. A net repayment of A$820m (US$655m) was made on its US dollar bilateral bank debt
- Newcrest has elected to retain the Telfer mine as opposed to previous indications it was considering selling the mine to repay debt
Summary of Newcrest’s operating performance
The table is a detailed summary of Newcrest’s operating performance for FY15 (12 months ended 30 June).
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