When in Oz, spin the gold

05 April 2010 | 05:08 Code : 19884 Geoscience events
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For years there has been a perception, muttered as such from some grizzly jaws...

For years there has been a perception, muttered as such from some grizzly jaws, that Australian gold stocks are relatively undervalued, given the princely ratings accorded to peers perched like big hairy Cheshire cats in North America. This Thursday’s action involving the continent’s two biggest gold names suggests that the perception may need a reality check of sorts.Newcrest’s proposed takeover of Lihir has been rejected, with a reaction akin to a kookaburra in full decibel madness mode, to at least foster the idea that further value can be squirreled out. Investors thought otherwise, taking Lihir’s stock price up by 33% on Thursday, pushing its market value to USD 8.8bn. A pro forma combined Newcrest-Lihir would today have a market value of USD 23.8bn, ranking it fifth globally, after Barrick, Freeport-McMoRan, Goldcorp, and just after Newmont.From a production viewpoint, the combined entity would rank sixth, after Barrick, Newmont, AngloGold Ashanti, Gold Fields, and Freeport-McMoRan, which operates the world’s biggest gold mine, but is not valued as a gold producer by the global investor community.The pro forma Newcrest-Lihir ratings are not too poor, considering a pro forma merged reported gold production for 2009 (Newcrest has a 30 June year end) of 2.8m ounces of gold (with 1.6m from Newcrest). The marketable metric is that pro forma production is set to rise substantially, mainly thanks to Newcrest, to a projected pro forma 3.75m ounces in 2014. This excludes potential further increments from, at Newcrest, Wafi/Golpu, O’Callaghans, Namosi, Camp Dome, Gosowong 2 Vertical Stockwork Corridor, West Dome Deeps, Marsden, and, for Lihir, in West Africa.Like a number of gold majors, Newcrest downplays, if not heavily treads on, the crucial role of base, and other, metals in its portfolio. For the 2009 financial year, gold contributed 76% of Newcrest’s revenue line, with much of the balance coming from copper sales, produced at its Cadia, Telfer and Ridgeway mines, and some from silver sales. The contribution from copper would have been higher, but for the total collapse in copper prices across the second half of 2008, followed by the gradual recovery across 2009, to recent levels which have made levels last seen about 18 months ago.On the reserves line, the pro forma merged entity offers the great benefit of two monsters: Cadia (copper-gold), which holds 65% of Newcrest’s 69m ounce reserves, expressed as gold-equivalent (that is, just be a sport and pretend that the copper is gold as well), and Lihir, which holds 94% of Lihir’s 31m ounces of reserves. The mine is found on Lihir, or Niolam, Island, the largest in the Lihir group of islands in Papua New Guinea’s New Ireland Province. Trends in recent years have shown convincingly that, given a choice, large scale, preferably monster, assets are more capital efficient.

SELECTED MAJOR GOLD STOCKS

 

 

 

Market

 

Three year

Three year

 

Value

 

Operating

Free cash

 

Current

 

cash flow

flow

 

USD bn

 

USD m

USD m

Yamana

7.224

 

1,008.3

-219.8

Goldcorp

27.303

 

2,280.7

-2,715.2

Harmony

4.048

 

612.0

-735.0

Lihir

8.782

 

359.6

-495.8

AngloGold Ashanti

13.751

 

2,749.0

-3,228.0

Barrick

37.739

 

6,885.0

-5,146.0

Newcrest

14.985

 

1,951.4

564.9

Gold Fields

8.926

 

2,188.1

-877.6

Kinross

11.895

 

1,570.4

-226.6

Newmont

24.601

 

4,903.0

-408.0

 

159.254

 

24,507.5

-13,487.1

 

 

 

 

 

Newcrest-Lihir*

23.767

 

2,311.0

69.1

 

 

 

 

 

Freeport-McMoRan

35.969

 

13,992.0

7,942.0

 

 

 

 

 

* Pro forma

 

 

 

 

This importance of the "capital" factor is increasing at an exponential rate, given the significant increases in capital costs as the commodity complex has generally experienced price increases, from 2001. The principle at work here applies both to new capital expenditure, and to stay-in-business capital expenditure.The free cash flow (operating cash flow less capital expenditure) numbers for a historic pro forma Newcrest-Lihir show up pretty well, over the past three calendar years, relative to other gold majors. This suggests that both Newcrest and Lihir have been relatively efficient in capital utilization, and capital allocation.

Tier I gold (and some copper) diggers

 

 

Stock

From

From

Value

 

price

high*

low*

USD bn

Yamana

USD 9.85

-31.5%

33.8%

7.224

Goldcorp

USD 37.22

-19.5%

39.3%

27.303

Polyus

USD 50.50

-15.0%

53.0%

9.627

Harmony

ZAR 69.00

-36.7%

1.9%

4.048

Lihir

AUD 4.04

-0.2%

67.6%

8.782

AngloGold Ashanti

USD 37.95

-20.1%

29.3%

13.751

Zijin

CNY 8.28

-32.6%

120.2%

12.779

Barrick

USD 38.34

-20.2%

41.5%

37.739

Newcrest

AUD 33.78

-15.0%

22.2%

14.985

Gold Fields

ZAR 91.92

-21.1%

10.6%

8.926

Kinross

USD 17.09

-28.5%

25.5%

11.895

Newmont

USD 50.93

-9.8%

38.5%

24.601

Buenaventura

USD 30.97

-27.5%

62.2%

8.513

Freeport-McMoRan

USD 83.54

-7.7%

128.3%

35.969

[[SPDR Gold Shares ETF]]

USD 108.95

-8.9%

28.3%

40.410

Tier I averages/total

 

-20.4%

48.1%

226.143

Weighted averages

 

-18.7%

48.6%

 

* 12-month

 

 

 

 

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