Newcrest needs a PNG fix

FOLLOWING the crash in the share price of Newcrest it is not surprising the company is coming in for much criticism and scrutiny. By Wantok

Much of the latest news is about the make-up of the Newcrest board but maybe some of the critics themselves may have some explaining to do about their sudden change of tune about the company.

The starting point for much of the negative critiques appears to be about the fall in the share price - not in itself surprising given the plunge particularly in gold prices - but much more about whether some analysts may have been favoured with "inside information", a claim that has been denied.

In all this scrutiny, little has been said about the possibility that Newcrest paid too much for its $US10 billion acquisition in 2010 of the Lihir gold mine in Papua New Guinea, now the single biggest gold operation in its stable as Australia's biggest gold producer.

The fall in the gold price has virtually confirmed that, at least in retrospect, it did pay too much for the property.

But Wantok likes to ponder this issue from yet another angle.

It appears the Newcrest due diligence studies prior to the merger with Lihir on a scrip deal may have been severely wanting.

For this it seems the board and top management would have to share the blame, possibly along with any outside "expert" parties that recommended the terms of the transaction.

For a rank outsider looking in it would seem the Newcrest board had been carried away by the size of the gold resource at Lihir and its touted expectation of becoming a million ounce producer.

In retrospect, even leaving aside the issue of value, one would have thought the Newcrest board would have taken an extremely cautious approach to the Lihir deal.

For starters, Lihir is very much like another traditionally important Newcrest property, the Telfer mine.

Both Lihir and Telfer share one common feature in terms of their ownership.

Both have been rather lacklustre or poor performers over the years with missed production targets and very variable costs that often bordered on loss-making.

Under its previous management Lihir had never lived up to its promise, facing constant battles over processing issues regarding its refractory ores and plant maintenance issues that constantly affected production targets.

In both cases management appears to have got very slack over the years as commodity prices skyrocketed, a feature shared with many others in the mining industry that started to believe they were caught up in some kind of never-ending boom.

The global financial crisis in late 2008 should have put paid to that kind of thinking but it never did because of the rapid recovery made by metal prices the following year.

When Telfer was last operating prior to the 2000 shutdown, its gold production costs were averaging $400 an ounce and, one would imagine, Lihir would have been at those levels.

Today both mines are struggling to be cashflow positive at $1200.

Lihir is not the only PNG problem faced by the Newcrest board.

It went into a 50:50 ambitious joint venture with South Africa's Harmony Gold even before the Lihir deal, with eyes sparkling at the prospect of a mega copper-gold project at Wafi-Golpu.

In the meantime, the JV has been saddled with the Hidden Valley silver-gold project in Morobe Province, where a mine shutdown would immediately slash significant losses and bring additional value to the Newcrest stock.

But this is not to be as the partners continue to struggle to slash costs and make the project viable.

Most observers would recognise that Newcrest and Harmony have totally different operating philosophies and experience - and there would be some concern about the 50:50 structure of their JV.

Although most PNG observers feel Newcrest's takeover of Lihir was the best thing that's happened for PNG on the mining front in recent years, there have also been suggestions that Australia's biggest gold miner shows some level of arrogance in its industry dealings.

Until the recent crash the Newcrest negotiators had apparently been almost boastful about their ability to fund Wafi-Golpu out of company cash flows, which now appears a near impossibility.

Certainly at the moment there is one clear jewel in the Newcrest crown and that is the Cadia operations in New South Wales.

Its two other mega properties at Lihir and Telfer need careful assessment about the way ahead - and the market probably still needs to be convinced that Lihir will actually be a million ounce producer in 2015.


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