Newcrest warns of more write-downs

The man in charge of Australia’s biggest gold miner has declared ”cash is king”, and indicated he will not consider asset sales, equity raisings or expensive new developments until his existing mines are performing at their full potential.

In his first formal appearance as the managing director of Newcrest Mining, Sandeep Biswas said he wanted the company to operate faster, but the strategy would otherwise continue largely unchanged.

While the new era at Newcrest has begun, one of Mr Biswas’ first jobs will be to deal with the misjudgements of the past, including asset write-downs worth as much as $2.5 billion.

While the final evaluation is not complete, Newcrest warned on Thursday that last year’s $6.2 billion round of impairments would soon be followed by another round of between $1.5 billion and $2.5 billion.

Like last year, the impairments will be dominated by the troublesome Lihir mine in Papua New Guinea, but will also affect the book values of the Telfer mine in Western Australia and the Bonikro asset in Ivory Coast.

Lihir was supposed to be a low-cost, long-life mine when it was acquired for $US10.5 billion in 2010, but it has been plagued by operational troubles ever since.

Despite little activity at Lihir over the past year – beyond the processing of stockpiles – the cost of production at the mine was still close to break even levels in recent months, and at Thursday’s gold price of $US1297 per ounce.

Mr Biswas labelled that performance disappointing and has launched a major review of the asset’s cost base.

Newcrest said most of the new impairments would be linked to revised assumptions for the cost of production at Lihir, as well as changes to exchange rate assumptions, which factor in the Australian dollar at $US80¢.

With more than 100 million tonnes of stockpiles at Lihir, Deutsche analyst Brett McKay said Newcrest could continue processing stockpiles for another year or so, but could not continue the strategy indefinitely.

”Not all of that 100 million tonnes is amenable to the current processing plant, that is why it was stockpiled in the first place, because the metallurgical  characteristics are not well matched to the processing plant,” he said.

Newcrest has a highly prospective deposit at Lihir called Kapit, but Mr Biswas declined to say when it could be developed, and indicated that running down the stockpiles for cash would continue for the time being.

”Cash is king and money is time,” he said. ”Near-term cash input is better than investing in something that is going to pay you something back in 20 years time.

”The first order of business is to get the through-puts up through the processing plant and get our costs down.”

UBS analyst Jo Battershill said the future of Lihir was a ”key uncertainty” and the miner had ”no apparent long-term plan” for the asset.

He said apart from the Cadia mine in NSW and the Gosowong mine in Indonesia, Newcrest’s assets were of ”very poor quality”.

Mr Biswas rejected the suggestion and named the Wafi-Golpu project in Papua New Guinea as the project he is most keen to develop during his tenure, subject to a fresh feasibility study being completed later this year.

Newcrest already has gearing levels around 30 per cent, and the new round of impairments will increase that by between 3 per cent and 6 per cent.

The miner has ambitions to return its gearing levels back towards 15 per cent, but like his predecessor Greg Robinson, Mr Biswas ruled out an equity raising for now.

Allan Gray portfolio manager Simon Marais said the resistance was justified.

”I really don’t think they have to [conduct an equity raising], they really are profitable at this gold price,” he said. ”‘Even at this gold price they can quickly start to make a big dent in their debt, and I think they will.”

When asked how his strategy for the company was different to that of his predecessor, Mr Biswas said he was creating a quicker and more agile company.

”I’m building on what Greg started in terms of dealing with the new world of gold prices, but in a very structured and intense and fast-paced way,” he said.

”The pace and what I call the tack-time of the organisation is really starting to increase.”

Despite beating its gold production guidance for the 2014 financial year by almost 100 million ounces, Newcrest shares closed 71¢ lower at $10.78.

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