Tuesday 26 April 2016 by Alen Golubovic Company updates

Newcrest delivers 33% quarterly uplift in cashflow margin


Newcrest has delivered an improved operational result for the March quarter. While the Newcrest bonds have rallied in recent months we believe there is still room for further upside if gold prices remain resilient

Newcrest has released its quarterly production report for the March 2016 quarter (link to announcement hereExternal link - opens in a new window). The report is positive for the credit, highlighting continued strengthening in the company’s cashflow margin driven by a resilient gold price, cost reductions and improved production levels with the resumption of full operations at the low cost Cadia mine. The key highlight is the 33% increase in the All-In Sustaining Cost (AISC) margin to USD458/ounce, which provides guidance as to the company’s free cashflow generation. A summary is provided in the table below:

Source: Newcrest

Key points:

  • The Group All-In Sustaining Cost (AISC) per ounce improved 4.5% to USD723/ounce driven by higher production from the low cost Cadia operation and a significant reduction in AISC per ounce at Hidden Valley. Combined with a higher gold price, the Group All-In Sustaining Cost per ounce margin increased 33% to USD 458/oz for the quarter. We estimate the company would have generated around USD300m in positive free cashflow (pre growth capex) in the quarter
  • Newcrest achieved slightly improved gold production (up 2.6%) driven by a full quarter of production at Cadia, partially offset by lower production at Gosowong following the previously announced geotechnical event in February 2016
  • Lihir maintained a stable AISC of USD 804/ounce, and achieved a grinding throughput rate of 12.9 million tonnes per annum for the quarter. It’s quarterly AISC margin of USD377/ounce continues to show good improvement

Credit spreads on the Newcrest lines have tightened significantly since the beginning of 2016, highlighting the rallying gold price and increased exposure to the gold sector as a ‘safe haven’ trade.

However, as seen in the chart below, spread levels are still roughly 70-80 basis points above the levels seen 12 months ago. This is an interesting observation because we believe Newcrest’s credit profile has improved over the past 12 months, and the credit appears undervalued relative to historical levels. If gold market conditions continue to remain supportive we anticipate further compression in spreads (and a resultant increase in bond prices, all other things being equal). 

Source: FIIG Securities

The Newcrest bonds are offered at the following indicative yields to maturity:

  • 2021 bond: 4.11%
  • 2022 bond: 4.29%
  • 2041 bond: 6.41%

Please contact your FIIG representative for further details on the Newcrest bonds. Available to wholesale investors only.