Attractive gold and copper exposure at a discount

Solid first half

NCM posted a good result, with 1H'FY17 underlying EBITDA of US$783m (vs Morgans estimate of US$774m) and underlying NPAT of US$273m (vs Morgans estimate of US$260m). Also roughly in line with our forecast, NCM reported 1H'FY17 free cash flow of US$258m, which allowed the company to reduce net debt to US$1.9bn.

NCM announced an interim dividend of US7.5 cents. While we are not forecasting a material step-up in dividends, the company did state that increased shareholder returns was one possibility being considered against the backdrop of rising cash flow.

PC2 progressing well, questions remain on Lihir

We take confidence from the apparently smooth progression of development of PC2, as it continues to ramp up production as NCM starts to move towards its elevated throughput target of 28mtpa. NCM still plans on finalising its pre-feasibility study into the future growth of Cadia by the end of this quarter. Meanwhile we remain conservative in our assumptions for Lihir, believing that the increased throughput will bring with it higher sustaining/indirect costs that could impede its long-term cash flow performance.

Long-life approach

Over the next three years, two of Newcrest Mining's (NCM) five producing assets will become depleted (which will actually see an increase in group EBITDA margin), while its two remaining operations (Cadia and Lihir) have a comfortable average remaining life between them of 27 years. This is a critical point of difference compared to most of NCM's peers, as it means there is no pressure on the big miner to pursue risky M&A activity in order to underpin its long-term earnings outlook. Instead, Newcrest can pursue growth through exploration activity, an area where it is increasingly active.

Contributed by Adrian Prendergast, Senior Analyst, Mining and Energy. Original blog here: (VIEW LINK)