- 30 January 2005
Ouch! Oh Dear! Should prove to be a good buying opportunity today for the long term. I'm not panicking and selling.
Profitseeker said:Ouch! Oh Dear! Should prove to be a good buying opportunity today for the long term. I'm not panicking and selling.
NEWCREST, AND THE BALL AND CHAIN THAT IS TELFER
www.aireview.com.au issue 82
Oct 27 2005
Australia’s premier gold miner, Newcrest Mining (NCM) has not been winning many fans this month.
Of AIR’s ten-broker universe, four have downgraded the stock in October. One has dropped the stock to Neutral, while the other three have gone one step further. Macquarie is feeling lonely at Outperform.
One broker to downgrade from Neutral to Sell is Merrill Lynch. This has fl owed from the analysts’ profi t downgrades of 17.4% in FY06 and 9.5% in FY07.
No prizes for guessing the root of the problem is Telfer, and the metallurgical problems it continues to face. Added diffi culties include a 1% fall in production in the September quarter from June, at a
cash cost of A$211/oz which is up 68%. Newcrest has issued its third profi t warning in 12 months.
For the geologically minded, Newcrest reports complex metallurgy continues to be encountered in the supergene zone of the orebody. Whilst planned commissioning of the pyrite plant in January 06 is expected to allow higher grades to be fed into the plant, a mineral called cobaltite is now impacting
concentrate specifi cations. Merrill Lynch suggests it appears more attention is needed to be paid in the feasibility study in regards to metallurgy. Newcrest is carrying out a metallurgical review which is not yet complete
but indicates that the Telfer ore reserve model will be confi rmed. Additionally, workforce turnover at Telfer remains extremely high at greater than 60% in the pit.
These issues are concerning to the analysts given Telfer makes up greater than 50% of their net present value calculation and contains 52% of group reserves. Corporate appeal is signifi cantly diminished, in the analysts’ view, whilst issues persist at Telfer given it is the key driver of earnings
growth and valuation moving forward.
The analysts’ valuation has now fallen by 5% to $8.85ps which equates to 2x net present value.
Profitseeker said:I don't believe anyone would make a takeover bid till Telfer is sorted. Thinking about selling out and waiting for an opportunity to renter.
The Barbarian Investor said:What do you like about Newcrest profitseeker?
Profitseeker said:Liked. I sold out in April but have been thining about reentering in weakness. Not because I do not like them long term but because there are so many other good opportunites around. I am also very confused about what state their hedge book is actually in. The fact that management has not released an annoucement about it suggests that it can not be pretty. However they remain a take over target and I think next year their hedging position gets better. If the price of gold is still high the share price could really take off then in a catch up situation.
Gold, copper boom hits Newcrest's hedgebook
JOHN PHACEAS The West Australian 27 April 2006
Booming copper and gold prices have punched another $600 million hole in Newcrest Mining's balance sheet in just three months, pushing its massive hedgebook almost $2 billion into the red.
Australia's biggest independent gold miner yesterday also revealed further problems at its flagship Telfer mine in the Pilbara, which resulted in lower than expected production for the March quarter.
Gold prices have soared to 25-year highs above $US630 an ounce this year, while copper is now at record levels around $US7150 a tonne. At the start of the year, gold was trading at $US520/oz while copper was worth $US4500 a tonne.
In its March quarterly, Newcrest revealed the mark-to-market value of its hedgebook had subsequently plunged $1.95 billion into the red, compared to $1.34 billion at the end of December.
Newcrest had 5.1 million ounces of gold hedged under contracts that were $1.7 billion in the red at the end of March, while contracts for 60,000 tonnes of copper were $266 million out of the money.
Though the company still enjoyed a healthy operating margin based on average production costs of $219/oz, the hedgebook restricted its average realised gold price to just $521/oz in the quarter - a big discount to yesterday's Australian dollar gold price of $846/oz.
Newcrest said gold production had slumped from 430,000oz in the December quarter to just under 368,000oz in the March period largely due to cyclonic weather and falling grades at Telfer, and scheduled maintenance shutdowns at its Cadia operations in NSW. Total copper output fell 12 per cent to 23,219 tonnes.
At the $1.4 billion Telfer mine, gold production slipped by almost 13,000oz to 162,800oz while copper production slid 29 per cent to 7770 tonnes.
Newcrest said gold output was lower than expected because of lower than budgeted ore grades caused by the need to bolster copper grades to comply with the specifications of its concentrate contracts.
In a further blow to Newcrest in the wake of the massive cost blowouts and delays which have already hampered the Telfer development, the company conceded it needed to develop a "better understanding of ore types and grades within areas of the pit" even though mining was expected to return to a higher grade zone in the current quarter.
On a brighter note, Newcrest said it had finally begun production from the Telfer underground mine and had commissioned the pyrite plant to maximise gold recovery.
Consequently, it believed its reduced 2005-06 production target of 700,000oz at Telfer remained "a realistic estimate". That target was down from its initial 800,000oz in February.
Newcrest also revealed managing director Tony Palmer would exit the company next week, leaving director Bryan Davis to become interim chief executive.
Analysts said the March numbers were disappointing and warned they could result in a further downgrade of profit forecasts for this year.
But investors were unfazed by the numbers, pushing the stock 77 ¢ higher to $22.79 on the back of the buoyant gold price and extending its gains to 44 per cent over the last year.
Feature Story: Gold Hedging – How and Why? Part II
FN Arena News - April 07 2006
Continuing from Part I
This all sounds very sensible doesn't it? The problem is, however, that it creates a dilemma for the shareholder of the mining company. An investor with a diversified portfolio can always sell out of gold mining shares if the view is that the gold price will go down. In a way, the shareholder is really not bothered with a need for the mining company to be hedged.
But where the shareholder loses out is on the upside. The price of gold might rally (and this is why an investor would hold gold mining stock) but the value of the shares may not rally in the same proportion by virtue of the hedge – the predetermined sales price obligations of the mining company.
This then becomes a quandary for the mining company, which may need to attract equity funding in order to proceed with a mining venture. Should the answer be simply death or glory? Should mining companies just not hedge?
Some don't, but then some have to. Hedging can be divided into that which is "discretionary" – on the decision of the mining company – and that which is "non-discretionary" – on the insistence of a third party.
That third party would be a lender of start-up capital for a particular mining project. It might be just a bank. Insistence may also come in the form of a necessity within a debt instrument of specific maturity, underwritten by an investment bank or other institution. While equity holders look to the upside, debt holders fear the downside.
The end result of all of this is you will find most gold miners have some level of hedging in place. Okay, this puts some limits on the upside, but then nothing else can go wrong, can it?
Oh yes indeed. Hedging is not the end of the risk. In fact, it creates its own risk.
In all of the hedging scenarios the common theme is that the gold miner will always ultimately produce the gold to meet the obligations. But what if it doesn't? What if the geological surveys were off the mark, or a mine collapses, or something goes terribly wrong in the production process?
If a miner can't come up with the gold, then it pretty much has to come up with the cash as compensation. But if the miner is not mining enough gold to sell, chances are there won't be a lot of that cash. This is the situation currently facing Croesus Mining (CRS).
Croesus has undertaken hedging which has left it with obligations its mines cannot fill. It has been burning cash to meet gold sale shortfalls, and there is still more to come. Yet the amount of gold it is extracting is nowhere near enough. Someone's estimates were terribly wrong. At present, trading in Croesus is suspended while the third parties see if they can keep it afloat.
Sons of Gwalia also had problems with gold production. As the end grew near, this was what the company put up as its excuse. The truth, however, was a bit more sinister.
Looking at our three hedging scenarios, borrow-and-sell, and forward-sell are straightforward concepts. Options are a bit more tricky, but the strategy presented here is what could be called a "vanilla" one. In the latter case, however, there is no end to the complexity of structured hedging deals that could be, and have been, constructed either by a counterparty, all of which have the theme of "optionality".
Optionality (the concept whereby a right exists, but not necessarily an obligation) is a form of leverage. Let's go back to shares for a minute to understand this.
You can buy BHP Billiton (BHP) shares now for $29.85 and pay for them. You can buy June expiry, $30 call options now for $1.78, and only pay $1.78. Provided BHP rallies by (30.00-29.85 + 1.78 =) $1.93 before June, your options will be break-even. Any upside above that is yours. No upside and you just lose $1.78, not $29.85.
Because you can sell the options before expiry, you could capture any upside to that point while still only having outlaid $1.78, but make an almost identical profit on the deal as if you have forked out for shares. But if you have X amount of money to invest, you can buy one hell of a lot more options than you could shares, and thus make one hell of a lot more money. This is called leverage.
Coming back to gold, the same applies in reverse. A gold miner could actually end up making a lot more than the upside in the gold price by virtue of option leverage provided the deal was structured accordingly and everything went to plan. In this way, hedging is no longer just hedging – it's punting. Of course, it all relies on producing enough gold…
That's what happened to Sons of Gwalia, and a number of other gold miners around the same time. They stopped using a hedge book as insurance, and started using it as a profit centre. And they came unstuck.
History is littered with hedgers who brought down a company – not just in gold.
The days of such highly risky, highly complex deals are over (for now). In fact, the level of gold hedging has actually halved in the last four years or so – not because the gold price has rallied, but because no one wants to touch complex, leveraged trades with a ten foot pole. Not miners anyway (hedge funds have taken over the role).
This is also resulted in a reduction of the number of hedging counterparties. The cowboys have left the ranch and only the traditional service-providers remain.
To hedge or not to hedge? That is yadayada. How are gold miners approaching this question in 2006?
Let's have a look at Newcrest (NCM) – Australia's leading gold company. There has been much discussion of late that Newcrest's share price is overvalued because although the gold price is going to the moon, the company has hedge obligations dating back five years. Five years ago the gold price was (a lot) less than US$500/oz, so the differences are obvious.
Newcrest's hedging policy is one that has come about largely from a non-discretionary perspective, such that hedging requirements formed part of its fund raising efforts for new projects begun when the gold price was at the bottom of its cycle. Five years ago, Newcrest hedged 90% of its forecast production. This was necessary to get such projects as Telfer off the ground (Or is that into it? Anyway, don't mention Telfer).
The accompanying table (provided on Newcrest's website) indicates the level of Newcrest's forward obligations. As you can see, there's some pretty low gold price numbers locked in for some large amounts. As we move into time however, Newcrest's hedge ration drops – to 75% for 06/07, 50% for 07/08 and so on until 10/11 is looking at ratios below 30%.
www.newcrest.com.au/hedgebook.asp (see attachment below)
Newcrest does not hedge on a discretionary basis, these were obligations. That is evident in the scaling down of the ratio (as risk would subside as the mine proved successful). This is not based on a gold price view, or the rally to date.
Newcrest's hedges are of the simple type. The company used to use more complex, option-style hedge transactions back when everyone else did, but not for punting. Management decided the return to simplicity not because the likes of Sons of Gwalia were biting the dust, but because the option-style hedges could not actually provide a known obligation in the future. Everything was dependent upon everything else.
This meant they couldn't produce a nice simple table like the one above, nor even be able to answer investor questions about hedging obligations. It was all a bit unnerving.
Counterparties still recommend gold miners hedge some of their production – but then they would. Miners are not so convinced, but then everyone needs insurance. If hedging is treated as insurance, then everybody knows where they stand – shareholders included.
Newcrest finds fix-it man in Rio's pool
By Barry FitzGerald
SMH May 16, 2006
NEWCREST has turned to a seasoned mining engineer, born and raised in Broken Hill and now running Rio Tinto's operational and technical excellence centre in London, to kick its troublesome $1.4 billion Telfer gold/copper project in Western Australia into shape.
He is new managing director Ian Kingsley Smith, 48. He has not come cheap, reflecting the plum position he is giving up within Rio's senior management team of 11 - a pool of talent from which it is likely that Rio will pluck a successor for its current chief, Leigh Clifford, another mining engineer who earned his stripes at Broken Hill.
Mr Smith will receive a base salary of $1.7 million. In addition, he can receive an annual performance lump sum equal to 50 per cent of that for an "on target" performance and 100 per cent for an "outstanding" performance. He will also be entitled to a long-term incentive under the group's executive share plan, with 165,000 rights to shares initially up for grabs given certain performance hurdles are cleared.
Mr Smith, who was not available for comment, was yesterday described as a lateral thinker who made his name early in his career by introducing a new mining method at Broken Hill when working for Pasminco's mining division.
The end result of the new technique (a semi non-entry form of mining using remote-controlled equipment) was that the then struggling mine was able to access high-grade lead ore that otherwise would have been left behind because it was too labour intensive to attack.
Mr Smith is also well aware of the dangers of underground mining operations. He was general manager of Pasminco's Elura mine in NSW in 1996 when part of the mine collapsed on a Saturday morning.
No one was injured in the collapse which occurred when a "crown pillar" failed.
More recently, Mr Smith had stints with WMC at Olympic Dam in South Australia and Rio's Comalco aluminium division in Brisbane. He has a reputation for being a quick and clear thinker, clinical but charming.
Mr Smith replaces Tony Palmer, who left Newcrest two weeks ago. Mr Palmer's total package in 2005 was $4.25 million. Newcrest's interim managing director, Bryan Davis, will hand over to Mr Smith on August 14 and will resume his position as a non-executive director of the company.
Mr Davis said yesterday that Newcrest searched both inside and outside the industry for Mr Palmer's replacement, also within and outside of Australia.
The Telfer project was hit by cost overruns and delays ahead of its start-up in February 2005. More recently, metallurgical issues forced Newcrest to slash its 2006 gold production forecast at Telfer by 100,000 ounces to 700,000 ounces.
Newcrest's heavily out-of-the-money hedge book is another issue that the market will be looking for comfort on from Mr Smith.
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