Newcrest 1H16 results were down on the prior period reflecting a 10% lower gold price. From a credit perspective, it was positive to see an improvement in free cash flow and that the company was still able to deleverage despite the lower gold price during the first half. We expect to see an improved 2H16 performance given the gold price is now rallying
Newcrest’s underlying profit in 1H16 of USD63m was USD117m lower than the corresponding prior period reflecting lower US dollar gold and copper prices and the lower contribution of the high margin Cadia mine which suffered an extended production outage. The average realised gold price was down 10% to USD1,113 per ounce over the period.
Despite the lower contribution from the low cost Cadia mine, Newcrest’s All-in Sustaining Cost (AISC) of USD770 per ounce sold was still 5% lower on an overall company basis. This was a reflection of lower operating costs as a result of cost and efficiency improvements, the benefit of weaker operating currencies against the US dollar and lower energy prices. The company was able to generate an AISC margin of 31% despite the lower gold price over the period, which was broadly on par with the 34% margin achieved in 1H15. Importantly, the previously troubled Lihir mine was free cash flow positive.
Source: Newcrest
Free cash flow of USD254m was USD40m higher than the corresponding period in 2015. All operations were free cash flow positive, except Hidden Valley, with improved free cash flow generation from Lihir, Cadia and West Africa. The free cash flow performance enabled an 8% reduction in net debt to USD2.65bn. At 31 December 2015, Newcrest had a gearing ratio of 28.1%, a reduction from 29.3% as at 30 June 2015. The net debt to EBITDA ratio improved to 2.1x from 2.6x.
Newcrest’s debt maturity profile is highlighted in the figure below. We believe the company’s earliest upcoming maturities of around USD100m in FY17 and USD200m in FY19 look very manageable in the context of recent performance and the rally in the gold price. The three unsecured bonds make up the majority of debt principal outstanding, while USD2.5bn remains undrawn on USD3.15bn worth of committed bilateral loan facilities.
Source: Newcrest
From a financial policy perspective, Newcrest looks to:
- Target an investment grade credit rating throughout the cycle;
- Maintain a leverage ratio (net debt to EBITDA) of less than 2.0x;
- Maintain a gearing ratio of below 25%; and
- Maintain diverse funding sources, sizeable committed undrawn bank facilities and USD debt with an appropriate tenor having regard to the life of the Group’s assets.
Since the beginning of 2016, gold prices have rallied by 15% in what has been a very turbulent environment for financial markets. We note that Newcrest’s 1H16 performance does not factor in the rally in gold prices and so we expect an improvement in performance over the second half of FY16, absent any further operational issues.
Newcrest’s shorter dated bonds have rallied by 50 to 60 basis points over the past week with the strengthening gold price but remain well priced noting shorter dated US dollar investment grade exposure. The Newcrest bonds are currently offered at the following indicatively yields to maturity*:
- 2021 bond: 5.70%
- 2022 bond: 5.80%
- 2041 bond: 7.50%
A link to the company’s announcement is available here
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Please contact your FIIG representative for further information on the Newcrest USD bonds.
*Quoted pricing is indicative only, accurate as at 15 February 2016 and subject to change. Available to wholesale investors only.