This ASX-listed gold stock is an attractive investment option
Page 1 of 1
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."
More from Morningstar
Nicholas Grove is a Morningstar journalist.
© 2016 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.