true gearing of ncm

OK,,,,,doing a bit of research........for years I've been saying forget the cash costs of production as they are misleading and the true costs of production were much higher........late June we have a new accounting standard for ALL IN SUSTAINING costs,,,,,it certainly an improvement but still easily manipulated I think by a company to project what it wants to project, ie they could say,,look we got our costs down, when in reality they are mining stockpiles and not really operating the mine normally, or they could say,look we got costs down if you exclude planned maintenance when in fact they just allocate expenses to one of the many accounts that make up the AISC....

anyhoo, debtate for another time, today I wanted to open a discussion on GEARING, and show you what I believe the ACTUAL true representation of Newcrest GEARING actually is in my view.

I do not see the current reporting represents a true and Fair view,,,people just read the reported number (29.1%PC, taken from last half financial accounts report)
and say
ok , not too bad right?
Not too high,
doesn't need equity even though its not Group cashflow positive from its own budgets,
it can cut costs in sustaining capex and mine stockpiles forever
The company may be a price taker with pressured margins, but it only geared 29.1%!

IF I lift the reported gearing ratio for the same company by 87.9PC to 54.7PC, would you feel the same way about the risk, would you have pushed it to over $14 and held?

NEt Debt 30/6/ 2013 4.142BLN
Shares on issue 766,510,971
Share price as at 30/6/2013 9.87 AUD
Market Capitalisation of Company 30/6/2013 7,565,463 Million AUD

GEARING : “the ratio of a company’s loan capital (debt) to the value of its ordinary shares (equity)
Debt to Equity Ratio= Debt/ Equity or Debt/how much your company is actually worth in the marketplace.

So a simple, true reflection of gearing for NCM as at 30th june
4142000000 (debt) / 7,565,463 (value of company – Equity Value)
54.7%

So why does NCM report 29.1PC
NCM reports Gearing ratio as = net debt to net debt plus equity)

Gearing as at 30/6/2013 was 29.1pc, after effecting the asset impairments and write-downs…..

But they use the value of equity on the books rather than what the market values the assets at. I think the market is more efficient and its saying as of 30/6/2013 9.87/share
If they reported what the market said Equity was worth on the 30/6/2013, using their calculation, the gearing is more like 35%, so there is a big difference between the book values and what the market is prepared to pay, so one would reasonably assume they have to make additional writedowns……………..

the market isn’t paying book value for non performing price takers, non div paying, flat producing , costs slashing businesses, I don’t think the carrying value is even close to what the market is paying and they should write down more.

If you used a simple Debt to Equity ratio, to what the market said they were prepared to pay for the equity at the time you get 54.7PC,,,,,,,,,,a measure of risk that is 87% higher

Either way I think their method is an absurd measure which misrepresents the true measure of risk…….one of the reasons I think the long termers are stepping back…..

Anyhoo that is in the past……….if we look at it in basic form today, what is one possible view
• Group Cashflow negative below 1450AUD, substantially below that figure for the majority of the QTR, slashing of costs ongoing.
• AUD getting smashed this QTR, 89.62 currently and being talked down at every opportunity by RBA government, he wants 85 cents as he thinks that will be good for business
• Guidance maintained, costs guidance 1200/oz expected to 30/6/2014
• Mining stockpiles to temporarily reduce cash costs
• Taken on additional 450M in USD debt
• 120M in payment to Tax office for “adjustments”

So lets look at the 30/6/2013 to get the rough idea of what net debt could be now..

AUD 30/6/2013 91.27 cents
AUD now 89.62 cents…..

On the 30th of June NCM reported

“Retranslation of USD debt 427M!!!!!!!!!!!!!”

In other words……

THE INCREASE IN THE VALUE OF DEBT NCM SHAREHOLDERS OWE HAS INCREASED 427M because the AUD has fallen…

So if we know they are borrowing more money, and been “adjusted” by the ATO to the value of 120M, it is probably fair to assume NET debt has not DECREASED

But as the AUD has fallen 1.8PC since 30th June lets see what happens

So if the “retranslation” at 91.27 cents is 427M in debt to be repaid at the 30th june
At current FX, the “retranslation “ on those figures would be an additional 7.6M

But NCM took on more debt 450M 17th OCT 2013,,AUD 95.5……so assuming its going to be drawn at some stage,,,,,,,,what would “retranslation mean” broadly at 89.62cents,,,,it would broadly be an increase of 6.2PC in the value of that additional debt,,,,450M USD X 1.062= 477.9M,,

or a 27.9M increase in debt………..

So one should ask,,,do you really want the AUD to plummet?…………..is that extra cashflow (assuming Gold USD remains the same going(IE POG AUD RISING )going to be good for shareholders,,,,or is it going to go towards covering the unhedged USD detonated mega debt which rises as AUD falls…..I think its definitely the later……..

So a simple Debt to equity ratio as the market likes to look forward based on what I can read
Net debt 4142BLn AUD 30/6/2013
Net debt 30/6/2013 “retranslated” again using todays FX 4142+7.6 =4149.6BLN
New Debt funding 450M USD 17/10/2013
New debt of 450M USD “retranslated” at todays FX price 477AUD
Total Debt/ Funding in place approx. as of today 4149.6+477= 4.6266BLN
Market value as of the close of business Friday (SP* shares on issue) 5.687BLN
Debt to equity ratio (simple gearing)= debt divided by equity
4.626/5.687 = 81.34%!!!!!!!!!!!

IF we use the Gearing method NCM uses, ( net debt divided by net debt plus equity) but using the Equity value the market says equity is worth as at close on Friday you get,
4.6266BLN/ (4.6266BLN+ 5.687BLN)= 44.66PC!

And if you put in the Book values of equity you’d report an even lower debt to equity or gearing level…….

But as I discuss above, I don’t think using that formulae is representative of the true situation when the market has assigned a 7.42 value on equity, in truth I think its potentially much much higher than being reported under the current standards…..

This is why I think the share price is weak, and will be continually weak whilst the AUD falls and gold falls, plenty of true embedded risk in the balance sheet for equity holders and one of the clear reasons imo that they are mining stockpiles and “slashing” at every available opportunity….

IMO they should definitely raise monster amounts of capital as they are gaining maybe from AUD POG rises, but going nowhere really as they get nailed by “retranslations” in their huge USD debt/ funding facilities as AUD falls.

They can cut for a time, but they cannot cut forever and they don’t control the POG AUD price,,,,so at some stage they will have to recognise that the market value for their assets is far south of what they still have being carried on their balance sheet…..there is simply just to much of a difference between their calculation of equity to what the market is trading at…..

Anyway enough of a rant,,was just doing some numbers ,,,29.1Pc, I don’t accept that calculation as remotely reflective of the true extend of the company’s debt/ equity position…..

IF the AUD plummets to 80 cents,,,,,,,that NEt debt situation for a group cashflow negative operation is going to become a severe problem in my opinion....

Time will tell but I still wouldn't buy it with GD or GHT's money and hold it with the metrics from NCM's own budgets being maintained and currently off a couple hundred million..

Good luck all