Here’s Where Newcrest Mining is Going Next

Newcrest Mining [ASX:NCM] is Australia’s largest gold producer. It’s a top five global gold company by output. It trades on the ASX for $11.24 and has a market capitalisation of $8.3 billion.

The company has rich gold mines with an average mine life of over 40 years. Its portfolio of assets includes the world class Cadia Valley mine. Cadia will be Australia’s largest underground mine and one of the largest in the world.

The good news for shareholders is that Newcrest appears to have resolved its production issues. This is important. Also, the Cadia East and Lihir expansions are due to come online in the medium term, which should help to boost overall production.

This is good because Lihir has caused a lot of pain for investors in the past. The previous management clearly overpaid for the asset, and Newcrest has had to write down the asset’s value by billions. At least the company has kept up consistent production levels.

Next year’s production looks to be a repeat of this year. Newcrest will continue to process stockpiles until the gold price turns around.

As for Cadia Valley, its production isn’t looking too hot — it’s set to decline on the back of a falling gold grade next year. But with Cadia East production increasing, production should be higher in 2016 thanks to its expansion plan.

All this spells good news for Newcrest shareholders as the company focuses on generating free cash flow. It’s fast becoming a shareholder friendly company.

But there’s one problem. Newcrest has far too much debt for my liking. And considering that it’s has to make a US$1.7 billion dollar debt payment in 2016, it needs all the free cash flow that it can get its hands on.

Newcrest acknowledges that it’s in an awkward position and has reduced its capital costs by over 70% since 2012. Next year, capital costs should fall even further — again this is good news.
However, the biggest risk is the gold price, though a falling Australian dollar will help the company.

Newcrest has a breakeven price of roughly US$1,270 (AU$1,350) — above this price, they will generate free cash flow. In Diggers & Drillers this week, I provided specific analysis on the gold price, showing that there’s a good chance it could fall to US$931 per tonne in the next two years. If this happens, Newcrest investors will likely feel a lot of pain.

So, that’s the fundamental picture. Let’s look at the technical picture. The chart below tracks the Newcrest Mining share price. Each bar represents one day.

Newcrest is trending upwards — albeit with very little momentum. Naturally, upwards is good news for shareholders.

On the chart above, I’ve shown three important supply and resistance lines.

Bottom support, shown by the blue line, is at $7.10. This was the 2002 high, which the market broke through in 2003. Recently, it acted as important support for the 2013 low. If the gold price heads to my target of US$931, this level will likely play a huge role in the future.

The black line shows the next support level at $9.16. This is important because the market found support here in 2003, 2004, 2013, and 2014. It’s likely that if the Newcrest share price retreats, it will temporarily bounce off $9.16.

Lastly, the green line shows the upper resistance level at $12.90. If Newcrest can break and hold this level, it will likely run to the $16 and $20 dollar levels quickly.

I’ve also shown the MACD indicator on the chart. I’ve drawn some arrows and boxes which show that the Newcrest share price runs when the MACD trends upwards. MACD is trending upwards, but without much momentum. The share price is stuttering as a result.

If you want to know which way the Newcrest share price will go next, watch gold. They will have a close relationship in the months ahead.

Jason Stevenson,
Resources Analyst, Money Morning

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