going for gold

Going for gold
Newcrest chief executive Ian Smith tells Business Spectator's Isabelle Oderberg:

The miner's balance sheet has the capacity to take $500 million in M&A He expects the range of opportunities in M&A to grow over the coming six to 12 months If any acquisitions are made, they are likely to be in gold, rather than copper He is staying mum on whether Oz Minerals has been in touch about its Martabe gold project, which it is looking to sell The group is in a healthy position, enhanced by the weaker local currency



Isabelle Oderberg: From what I can see, your share price followed the gold price downwards through the big dip in October, but it seems to have made a consistent move upwards since then, despite the gold price being quite volatile. What do you think is supporting the share price? You haven’t suffered anywhere near as badly as some of your peers.

Ian Smith: Well, it’s interesting, though. We actually followed the US gold price through the first couple of months, but I think people realised that we generate our revenue in Australian dollars, so there’s been a bit of a re-rating I think, in line with what the Aussie dollar gold price has been over the last few months.

IO: Is that quite a shift for you? I mean how have shareholders normally treated your shares? They’ve normally looked at the US price, have they?

IS: Yeah. Well, if you look over time, most gold companies move in line with the US gold movements, but since July we’ve seen a massive revaluation of our Australian dollars. So, gold is now sitting in excess of $1200 Australian, even though the US gold prices are in the range of $830 or $840 today. So, you know the Aussie has been acting as an effective hedge if you like for commodity companies.

IO: Interesting that you should raise hedging because I wanted to ask you about it. Newcrest doesn’t have any now, does it?

IS: None at all.

IO: How important was it for the company to get rid of the hedging?

IS: You know, I think that whole move we did last year with raising equity and quitting our complete hedge, plus paying off a fair bit of our debt – because when we removed the hedge, that gave us a greater revenue stream and we were able to pay off nearly a billion dollars in debt last year – really set us up for a very strong position at the moment.

IO: So there’s no plan to re hedge anytime in the future?

IS: No. [Laughter]

IO: I’m just wondering generally speaking about the market and about all the participants, not specifically Newcrest, a lot of people are predicting that the gold price will rise as it sort of safe haven status kind of gets more and more attractive. Do you think that other people will re-hedge or do you think that they’ve learned their lessons?

IS: Well, it’s an interesting question. I don’t see the majors in gold rushing out to hedge in the short time-period that we face over the next 12 months or so. I think there are more preconditions in place for a good run on gold prices going forward and in those types of conditions, I doubt whether any of the majors would be seriously considering hedging.

IO: But in terms of tight credit markets, I’m wondering whether some of the juniors would find it attractive.

IS: Oh, some of the juniors may. If you’re a junior trying to get away a project and you want to change the risk profile associated with a project, then in those types of circumstances it may be right and proper to hedge, but if you’re a gold company that’s generating a good cash flow I think you’d want to be fully open to the upside that the gold market’s really portraying at the moment.

IO: What’s your outlook for gold? I mean I know you’re going to say “up”, but if you could extrapolate a little bit ... [Laughter]

IS: Look, it’s a darn hard question, because you can ask that of any commodity in the world and then ask it of gold and you’ve got the two drivers; gold as a commodity and a currency. On the commodity side at the moment, there’s a physical shortage of gold. People just can’t acquire gold around the world. The mints are running out of gold, there’s a shortage of gold bars, people are paying a premium.

Then on the currency front, people have still been putting a lot of their money in the US Treasury bonds, which is acting against a big run up in gold. If you think that inflation is building, if some of these pre-conditions for instability over 2009 will continue, then on the currency side of gold, the preconditions are there for a good run.

IO: I was speaking to someone the other day who told me that he was talking to a whole lot of traders from the US who are actually choosing to put their personal money into gold bullion. Are you hearing any stories like that?

IS: We’re hearing that some traders and some people acting on behalf of traders are trying to get as much physical gold as possible, but as I said before there is a physical shortage of the solid material called gold around the world. So, I don’t think all the people who want to avail themselves of that opportunity really can get their hands on bars of gold, etc at the moment.

IO: Historically what’s the kind of impact that an economic downturn has on the jewellery segment in terms of demand?

IS: It really is a function of the price, it’s a function of the rate at which the price moves. Let’s just say, you know, in that period where the price is moving up quite rapidly, demand drops off, but as it stabilises it doesn’t matter if it jumps, you know, X per cent and then stabilises or it’s dropped X per cent and then stabilises, then you see demand come back. So I don’t think the materiality or the level of gold over time has that much effect on demand in jewellery. It’s just the rate of change of gold price.So, people will try and pick when they buy the gold to act as a store that’ll eventually feed through into jewellery.

IO: What are your current cash costs sitting around per ounce on the production side?

IS: If you take a 70-cent as exchange rate, at the end of the last quarter we were sitting around 220-ish, 230-ish after copper credits. We’re about to come out in January with the latest quarterly results, so I can’t really pre-empt that number, but we’ve had the negative effect of copper prices going down and the positive effect, this is all in US dollars by the way, the positive effect of what the Australian dollar has been doing. So, if you take those two effects together, we’re still well-positioned, with quite a margin on each ounce of gold that we’re selling into the market.

IO: So the copper isn’t having too much of negative effect?

IS: Oh, well, it’s less than 20 per cent of our overall revenue, so the Aussie dollar’s having more a positive effect than copper’s been having a negative effect.

IO: So you must be one of the only companies that’s like whooping and happy with how weak the Australian dollar has been?

IS: [Laughs] Well, I don’t know if we’re whooping and hollering, but we are in a strong position in that we are building two mines at the moment; one at Hidden Valley in PNG and one at Ridgeway Deeps. Knowing what’s been going on this market has affected that time-frame and how we’re going forward. We’re still going to be moving from pre-feasibility to feasibility for Cadia East, so we’re just continuing on with what we’ve told the market previously.

IO: There haven’t been any guidance changes. Are there any factors that you’re watching that could impact those elements?

IS: Well, we don’t give profit guidance. We give guidance on what our cost structure is going to be and our production levels and then people can apply their own gold and copper prices going forward. But I think, the main thing, when people determine what our profit will be, is their stance on gold going forward and their stance on copper. It’s pretty simple with us.

IO: So they’ll be the key factors that influence any form of guidance in the new year, you think? Is that fair?

IS: Yeah. Those two and the exchange rate.

IO: Your next refinancing’s quite a way off, isn’t it?

IS: Yeah. The first tranche of our refinancing is about $US150 million is not until 2010.

IO: That puts you in a pretty good position.

IS: We’re in a very strong position at the moment. We’re generating good cash. As I said we’re in the midst of by June 30 next year we’ll have two new mines online and the cash call going forward post those two mines going on really puts us in a very strong position.

IO: Was that how the dates fell or did you see the credit crunch coming and try and get your facilities in place? Was it fortuitous or planned?

IS: Well, in hindsight I’d love to say it was fortuitous and planned. But as we’ve paid off our debt last year and I’ve said previously we paid off nearly a billion dollars, we tried to structure those debt repayments in a way that’s set us up in a very secure way for the future. So, we have been able to plan, luckily, for our own future.

IO: I was going through some presentations on the ASX that were given to investors recently and I noticed that there was a note saying that on the M&A side there’s a $500 million capacity on the balance sheet currently. There are a lot of companies in a fair amount of strife at the moment, where you have been actively shopping around for possible acquisitions.

IS: You know, it’s an interesting point. We think that the amount of opportunities that’ll be presented to us will grow over the next six to twelve months. We’ve had a whole range of people coming to us with opportunities and assets and whatever.

IS: We're going to have two teams set up within the company; one within the exploration group to look at early entry M&A, so how do we get into a project early in that slot, and then we have another team set up within the finance group that are looking for more mature opportunities. So, we are actively looking, but we’re very mindful of the fact that the number and range of opportunities over the next six to twelve months means that we don’t necessarily have to rush at the first one that’s presented to us.

IO: Has OZ Minerals been in touch?

IS: Oh, we talk to a range of companies on an ongoing basis.

IO: I’m just wondering whether Martabe might be of any interest?

IS: As I’ve said, we’ve got a whole range of opportunities in front of us.

IO: On a personal level, what kind of transaction do you think would make sense for Newcrest? I mean would you personally prefer something along the more early stages or do you prefer a more mature asset or does it just depend on the price?

IS: Acquisitions-wise, I think there’s a whole range of opportunities. We’re looking for acquisitions going forward that would enhance our gold profile. You know, with Namosi and with Golpu and Cadia East, we really do have a pretty good profile on copper going forward, so anything we were to look at in the future would really need to enhance our gold profile into the future.

IO: Is there anything you wanted to comment on that I haven’t asked you about?

IS: The main point is that we are in a pretty strong position and with hindsight, that move on equity that we did last year has really put us into a different position from a lot of other companies.

IO: Thanks for your time Ian.