PRECIOUS METALS

Newcrest's rating lifted

S&P Global Ratings lifts Newcrest Mining's credit rating following the release of its FY18 results

Staff reporter

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The company's rating has been lifted to ‘BBB' from ‘BBB-‘ with a stable outlook, reflecting S&P's expectation that Newcrest's conservative financial policies, low-cost position, and long reserve life should sustain its strong credit metrics.

Last month, Newcrest posted a 16% rise in full-year underlying profit to US$459 million, and a 47% increase in final dividend to 11c per share.

Free cashflow of $601 million enabled a 31% drop in net debt to $1 billion.

"Newcrest's results for fiscal 2018 were strong, underpinned by record production at its Lihir gold mine in Papua New Guinea (PNG) and strong recovery at its Cadia mine, New South Wales," S&P said.

While it forecast short-term volatility in gold prices, S&P expects the price to be relatively stable at $1250 an ounce for the next two years.

S&P said Newcrest had a "robust position" as a global gold major, backed by a long reserve life of more than 25 years and low costs.

"Offsetting these strengths are: the company's limited product diversity, significant dependence on a few large operations, and exposure to country risks in PNG," it said.

Analysts expect Newcrest to maintain its low-cost position and generate "above average profitability".

"In addition, we estimate the company could generate free operating cashflow (after sustaining capital expenditure) even if gold prices declined to US$900 per ounce," S&P said.

"The company's all-in sustaining costs were between $762/oz and $835/oz annually during the past four years."

S&P said Newcrest's earnings were sensitive to unplanned outages, like what had been seen at Cadia with the April 2017 seismic event and a tailings dam embankment failure earlier this year.

"That said, Cadia recovered strongly from both events, with an annualised mill throughput rate exceeding the 30Mtpa) target as of June 2018," it said.

"The company's asset diversity would improve as Newcrest's interest in Lundin Gold's Frutal del Norte gold mine starts contributing to Newcrest's earnings."

Exposure to PNG will increase if Newcrest proceeds with the development of Wafi-Golpu, leaving it exposed to elevated country risk, according to S&P.

However, it said a key rating strength was Newcrest's conservative financial management and low gearing.

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