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This ASX-listed gold stock is an attractive investment option

Nicholas Grove  |  28 Nov 2016Text size  Decrease  Increase  |  

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There's a quality ASX-listed gold miner which, while lacking a moat rating, still represents a relatively attractive investment even when trading near fair value.


Newcrest Mining (ASX: NCM) last week held an investor day in Sydney, and while nothing "earth-shattering" may have shaken loose from the presentation, it nonetheless reaffirmed Morningstar's view of the overall quality of the gold miner.

And while the "go-to" Australian-listed gold stock may be currently trading close to fair value, Morningstar head of basic materials Mathew Hodge still thinks Newcrest is relatively attractive in what he describes as a generally overvalued market for miners.

"Newcrest trading near fair value is a relatively attractive investment option versus the generally overvalued Australian mining peers," Hodge says in a recent note.

"This is particularly true relative to the smaller Australian-listed gold mining peers. It is striking that ASX-listed Northern Star Resources (ASX: NST) trades at an enterprise value/gold equivalent reserve ounce multiple in excess of US$1,000 per ounce versus less than US$200 per ounce for Newcrest.

"In our view, the optionality that comes from Newcrest's longer-life deposits is being overlooked, as is the challenge to extend life for the smaller miners."

Newcrest possesses several world-scale deposits in the form of its Cadia, Telfer, Lihir and Wafi-Golpu mines. As Hodge explains, such globally large deposits typically bring significant exploration upside and options for expansion.

"Newcrest's reserves are massive and mine life is long, offering leverage to upwards movements in the gold price," he says.

"The company brings better-than-average expansion potential among its gold/copper mining peers, particularly at the large, relatively high-grade undeveloped Wafi-Golpu deposit."

While there was nothing particularly new to say about Wafi-Golpu at the investor day, Hodge came away from the briefing with the view that the deposit, located in Papua New Guinea, is increasingly likely to be developed.

"Management is enthusiastic about the opportunities to add value at long-life operations in Lihir and Cadia, and we think the temptation to add a third long-life mine in Wafi-Golpu will be difficult to resist," he says.

"While we're less optimistic than management on commodity prices, we can see the mine will offer up potential value-adding expansion options once in production.

"The upside potential will probably see the project win board approval."

No moat, high fair value uncertainty

Hodge says while Newcrest may have managed to regain a position in the bottom-half of the industry cost curve, it still lacks a sufficient cost advantage over its peers to justify a moat due to the capital-intensive nature and cyclicality of mining.

Also, Newcrest carries a high fair value uncertainty rating which reflects the single commodity risk, the company's financial leverage, and its exposure to exploration uncertainty and mine development risk, Hodge says.

Regardless, Hodge says a lot has changed at Newcrest in the past few years under the stewardship of Sandeep Biswas.

"Most notably, costs have been cut and the balance sheet greatly improved. Newcrest is now on a sound operating and financial footing."

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Nicholas Grove is a Morningstar journalist.

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