Gold May Tumble, But Love for Newcrest Bonds Seen Here to Stay

Newcrest Mining Ltd. bondholders are reaping the rewards of the surge in gold that has the metal on course...

Newcrest Mining Ltd. bondholders are reaping the rewards of the surge in gold that has the metal on course for its best quarterly gain in almost 30 years. They could keep on prospering even if prices make an expected retreat.

Dollar debt from Australia’s biggest gold producer is poised to return 14 percent this quarter, the most since at least 2012, according to a Bank of America Merrill Lynch index. While the precious metal this month climbed to a one-year high of $1,284.64 an ounce, the median forecast in a Bloomberg survey of analysts is for gold to drop to $1,150 by the end of 2016.

Newcrest has taken advantage of the spike to lock in pricing for more than half a million ounces of output, providing some additional comfort for creditors as Chief Executive Officer Sandeep Biswas trims costs, increases production and reduces leverage. Moody’s Investors Service argues that even assuming a price of $1,100 an ounce, the Melbourne-based producer would be able to generate cash and cut its debt burden.

“Even if gold prices, whether in U.S. dollars or Australian dollars, come off a bit, it shouldn’t affect the overall story too much,” Anthony Ip, a credit sector specialist at Citigroup Inc. in Sydney, said by phone. With average production costs of $770 an ounce in the six months to Dec. 31, lower prices wouldn’t “materially change the deleveraging story, and the free cash flow story that’s occurring,” he said.

Bullion for immediate delivery traded at $1,228.14 an ounce as of 1 p.m. on Thursday in Sydney, equating to A$1,604.57. The price in Australian dollar terms reached a four-year high of A$1,778.65 on Feb. 11, although an appreciation of the local currency since then has raised costs and eroded some benefits for suppliers in the country, the world’s largest gold producer after China.

Newcrest declined to comment on the performance of its notes. The producer, with mines in Australia, Papua New Guinea, Indonesia and the Ivory Coast, trimmed costs in the second half of 2015 by 5 percent from the same period a year earlier, boosted production and outlined a potential lower-cost expansion plan at Lihir, its largest mine.

The producer has also taken advantage of gold’s almost 16 percent leap in 2016 to add its first hedging on the metal in eight years to cover some production at its higher cost Telfer operation in Western Australia.

Bond Performance

Improvements in Newcrest’s performance aren’t yet fully reflected in the performance of its notes compared with gold-producing peers, according to Citigroup’s Ip. While the yield premium over government notes on the producer’s 2021 bonds has narrowed to 348 basis points, the spread on similar tenor securities issued by comparably rated Canadian peer Barrick Gold Corp. is just 270.

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“Looking ahead and putting the gold price to one side, there’s a relative value argument to make here,” Ip said. “It still looks quite cheap.”

The company’s Lihir mine in particular has had trouble with maintaining a consistent operating performance in the past, according to Michael Bush, a Melbourne-based credit strategist at National Australia Bank Ltd.

“They’ve done very well over the last year, absolutely, but they’ll need to continue that performance to convince the market that the operation, and particularly the mill, has properly been turned around,” he said.

While Moody’s has issued downgrades to mining competitors including Rio Tinto Group and BHP Billiton Ltd. this year amid a collapse in the prices of other metals and materials, it affirmed Newcrest’s Baa3 rating this month after placing it under review for a possible cut in January.

The rebound in gold prices is also helping Newcrest’s fellow Melbourne-based miner St. Barbara Ltd., which this week had its credit rating raised one level to B by Standard & Poor’s amid an improvement in operating performance.

“For the gold miners, the important thing to understand is that they’ve actually gone through a lot of the restructuring, assets sales and removal of costs,” said Citigroup’s Ip. “They started doing that a lot earlier than some of the other mining companies, because you’ve had a three- or four-year period of gold prices dropping.”

To contact the reporters on this story: Benjamin Purvis in Sydney at bpurvis@bloomberg.net, David Stringer in Melbourne at dstringer3@bloomberg.net. To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Jason Rogers at jrogers73@bloomberg.net, Sandy Hendry at shendry@bloomberg.net, Ken McCallum, Keith Gosman

By: Benjamin Purvis and David Stringer

©2016 Bloomberg News

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