After being engulfed in a disclosure debacle in June last year that resulted in it paying penalties of $1.2 million, Newcrest kept a tight lid on its latest writedown announcement, but its news was still downbeat.
The group put new internal disclosure processes in place after last year's crisis, which centred on selective briefings the company gave to stockbroker analysts.
One of them imposed a two-week "blackout" period ahead of market-sensitive reports, and Thursday's June quarter production report and a separate announcement foreshadowing impairment charges of between $1.5 billion and $2.5 billion qualified: the cone of silence was in place ahead of their release, and a comparison with last year is revealing.
Ahead of last year's June 7 announcement of writedowns of more than $6 billion, Newcrest's share price plunged amid a flurry of broker downgrades. It fell from $15.12 to $13.36 between June 3 and June 6, and fell to $12.35 the following day when the $6 billion hit was announced. It was below $10 by the end of June, and bottomed out at $6.99 in mid-December.
Newcrest's share price ahead of the latest announcement, in contrast, was stable. It finished last week at $11.52, and closed at $11.49 on Wednesday. It fell by 6.2 per cent on Thursday, however, as investors digested Newcrest's news.
The group handled its disclosure more skilfully, and it revealed a 15 per cent lift in June quarter gold production and a 14 per cent lift in production in the year to June. Free cash flow in the year to June will be about $130 million, a big improvement on last year's $1.2 billion deficit.
Thursday's announcement raised questions about the state of Newcrest's giant Lihir gold mine in Papua New Guinea, however.
Newcrest took publicly-listed Lihir over in the second half of 2010 with a bid that was weighted heavily to shares that were trading above $40. The takeover valued Lihir at more than $10.5 billion, but last year’s $6 billion-plus charge included goodwill writedowns on the Lihir acquisition of more than $3 billion that cut Lihir’s book value to $7.6 billion.
Lihir will again be the biggest item in the new writedowns, and Newcrest's June quarter report raises the possibility that the second writedown may not be the end of the matter.
After the writedown, Lihir will still be in Newcrest's books with a multi-billion valuation, and in the June quarter it produced 174,601 ounces of gold at an all-in cost of $US1225 an ounce: on Thursday afternoon, the gold price was only $US72.51, or 5.9 per cent higher than that.
Gold fell from almost $US1700 an ounce at the beginning of last year to a low of $US1196 an ounce in December. Geopolitical tensions have dragged it higher in recent weeks, and in the March quarter, six months of global gold oversupply ended, with demand equalling 103 per cent of supply.
With global inflation low and rate rises on the horizon the metal still has lead in its saddlebags, however, and Lihir's cost base is badly out of line with Newcrest's other operations.
All-in costs were just $US304 an ounce at the group's Cadia Valley mine near Orange in New South Wales, which produced 54,040 ounces of gold in the June quarter. It is an asset that is undervalued on Newcrest's balance sheet.
The carrying value of Newcrest's Telfer mine in Western Australia is also going to be cut to reflect the persistent strength of the Australian dollar, which erodes $A receipts on US dollar-denominated sales of gold. It is a much more efficient mine than Lihir, however, with production of 128,372 ounces at an all-in cost of $US784 an ounce in the June quarter. The group's Gosowong mine in Indonesia produced 124,967 ounces in the quarter, at an all-in cost of $US522 an ounce.
The reduction in Lihir's carrying value takes the mine's "disappointing" cost performance into account, Newcrest says, and the group's new chief executive Sandeep Biswas says a major review and overhaul of the operation is under way.
It is about pushing more ore through at a lower cost, he says. Newcrest has spent $1 billion upgrading Lihir in the past three years and Biswas says it is a "fabulous ore body," with an estimated mine life of 50 years, by far the longest in Newcrest's portfolio.
Still, a mine has to make money and cover its cost of capital to be worth persisting with. If the gold price remains weak, Lihir will have to cut costs heavily to secure its future.