Newcrest Mining: Project development to reset cost base

About the author:

Mat Collings
Author name:
By Mat Collings
Job title:
Research Analyst
Date posted:
07 December 2021, 9:00 AM
Sectors Covered:
Mining

  • Using feasibility study announcements and the recent acquisition of Pretium (subject to regulatory approval) in Canada as a catalyst, we undertake a full bottom-up review of our assumptions for NCM.
  • The key change since our previous update is to capital assumptions across NCM’s portfolio and the associated changes to operating costs.
  • The price target for NCM reduces by about 10% to (login to view) and we retain an add rating on the stock.

Event

Full rebuild of our modelled operating assumptions for NCM, and integration of the Brucejack mine from the Pretium acquisition (which remains subject to regulatory approval in Canada in early CY22).

Analysis

NCM recently published studies outlining medium term development plans for its major assets at Cadia, Red Chris, Havieron (Telfer) and Lihir.

We integrate these updated opex, capex and production figures into our NCM model, along with Pretium’s Brucejack mine in Canada – maintaining a base case in line with Pretium’s published technical studies (though noting NCM’s larger ambitions for the province).

Our capital estimates move up substantially from previous assumptions, but our operating cost estimates also fall considerably.

Forecast and valuation update

Our revenue and production forecasts are not substantially changed in the current year given the timing of project development plans and the Pretium acquisition. 

Details of changes to our financial forecasts are provided on page 4.

On integration of the new detail, our price target reduces to (login to view) per share and we maintain an add rating, using a sum of the parts DCF model.

Investment view

There is a lot of work to be done across the NCM portfolio in the coming years, from the (relatively) incremental work to continue developing Cadia to the major changes in operation strategy at Red Chris and Telfer/Havieron. Execution risk is the key one to watch going forward.

We see the potential for much greater value at Telfer/Havieron and Brucejack than current information from the company allows us to model.

Price catalysts

We see no major near-term catalysts for NCM but would anticipate more positive information on the opportunities for the company in Canada (at Red Chris and Brucejack) and at Havieron in the coming months as likely to provide upside to our current base case.

Risks

NCM is progressing a series of major capital development programs across its operations to shore up gold production and drive down costs. The risks of delays or cost overruns in these investments is the key risk to NCM in the short/medium term.

Global commodity prices and currency fluctuations (given NCM’s geographic spread) are the key risk to revenue projects in the near term.

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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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