Category: Financial Markets
Business Strategy & Outlook:
Newcrest Mining is a gold-copper miner with mines in Australia, Papua New Guinea, Canada, and its minority-owned mines in Ecuador. The company is estimated to produce more than 1.8 million ounces of gold and around 120,000 tonnes of copper in fiscal 2022, with the acquisition of Brucejack resulting in gold production increasing to average more than 2 million ounces per year for the next decade. Around 80% of its estimated mid cycle revenue is from gold with most of the remainder from copper. Copper’s contribution is likely to rise over time as Newcrest’s various developments commence production. Newcrest has no moat despite a history of low-cost production, save a cost spike around 2013, and long mine lives. Returns have improved post the expensive acquisition of Lihir, but are likely to remain below the company’s cost of capital for the foreseeable future. Newcrest accounts for less than 2% of global mine production and is a price taker. Gold is increasingly the plaything of investors and subject to swings in sentiment. In 2001, gold consumption for jewellery and technology accounted for 91% of global demand, but in 2021 this had fallen to 50% as a result of increased investor demand and weaker gold consumption. There is also uncertainty around exploration success and the cost to buy or develop new mines, which are an important part of Newcrest’s future value.
Current management was installed in 2014 and brought a focus on cost efficiency, capital discipline and optimisation. Under Sandeep Biswas, Newcrest has been a much more reliable producer and has delivered incremental improvements at its operations, boosting throughput and lowering unit costs, particularly at Lihir and Cadia. Newcrest has a solid exploration record, with successful discoveries expanding reserves at Cadia and Telfer in particular in recent decades. Reserves at the end of 2021 were 54 million ounces of gold and 7.9 million tonnes of copper, representing more than two decades of reserves at current production rates.
Financial Strengths:
The company’s balance sheet is in reasonable shape. Newcrest ended June 2022 with net debt of USD 1.3 billion after buying the Brucejack gold mine in Canada, up from net cash of about USD 0.2 billion at the end of fiscal 2021. Despite the increase, the balance sheet will likely remain strong. Net debt/EBITDA is forecasted to peak at around 0.7 in fiscal 2023 before declining over the remainder of the forecast period. Newcrest has long-dated corporate bonds totalling USD 1.65 billion. The bonds mature in fiscal 2030, 2042, and 2050 with maturities of USD 650 million, USD 500 million, and USD 500 million, respectively. Newcrest has significant liquidity. As at the end of June 2022, the company had USD 0.6 billion of cash and USD 1.9 billion of undrawn debt.
Bulls Say:
- The shares are undervalued. Newcrest is well managed and has a suite of low-cost, long-life mines, which isn’t currently being recognized by investors.
- Gold can provide a hedge to inflation risk and offer some benefit in times of market uncertainty. Gold can gain from continued money printing and/or if there is a flight to safety.
- Newcrest owns several world-scale deposits in Cadia, Telfer, Lihir, and Wafi-Golpu. Large deposits typically bring significant exploration upside and expansion options.
Company Description:
Newcrest is an Australia-based gold and, to a lesser extent, copper miner. Operations are mainly in Australia and Papua New Guinea. The company also owns a 32% stake in the Fruta Del Norte gold mine in Ecuador, while the acquisition of Brucejack in 2022 adds to its 70% stake in the Red Chris mine in Canada. The company is likely to produce around 2 million ounces of gold per year over the next decade, making it one of the larger global gold producers but still only accounting for less than 2% of total supply. Cash costs are below the industry average and amongst the lowest of the global gold miners, underpinned by improvements at Lihir and Cadia. Organic growth options include its Havieron prospect, the Red Chris underground mine, and the high-grade Wafi-Golpu copper-gold prospect in PNG.
(Source: Morningstar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.
The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.
The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
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Business Strategy & Outlook
While many of its peers have announced intentions to divert investment to renewables to achieve long-term carbon intensity reduction targets, ExxonMobil remains committed to oil and gas. It has responded to calls to bring in more outside voices to its board and announced emissions reduction targets. It is also investing in low-carbon technologies, but each of these efforts is measured and keeps oil and gas production at the core. While this strategy is unlikely to win praise from environmentally oriented investors, it’s likely to prove more successful and probably holds less risk. The end of oil is likely to occur, but not anytime soon. Gas is likely to have an even longer life, thanks to the relative attractiveness of its emissions intensity to coal for power generation and the need to supplement intermittent renewable power. These trends along with growing demand for chemicals are what drives Exxon’s investment strategy and will likely deliver superior returns. To satisfy investors, Exxon has reduced previously aggressive spending plans by over 30% to $20 billion-$25 billion annually for 2022-26, which should keep the dividend safe at $50 a barrel. Earnings should still grow, however. Current plans call for a doubling of earnings and cash flow from 2019 levels by 2027, thanks to structural cost efficiencies and high-margin new projects. Production will grow modestly through 2027, but portfolio profitability is set to improve thanks largely to high-margin Guyana volumes (more than 850 thousand barrels of oil equivalent per day by 2027) backfilling declines in North American dry gas production and lower value divestments. Exxon’s high-quality Permian position, which affords capital flexibility and generates free cash flow, should surpass 800 mboe/d by 2027. Exxon’s downstream and chemical segments have suffered from decade-low industry margins in the recent past, but market conditions are beginning to revert to midcycle levels, lifting earnings. Investments will focus on producing higher-value lubricants and diesel in its downstream segment and performance products in its chemical segment, which should lift returns and earnings further.
Financial Strengths
In 2020, Exxon relied on its balance sheet to avoid cutting its dividend. As a result, gross debt increased from $46.9 billion at year-end 2019 to $67.6 billion at year-end 2020. By year-end 2021, Exxon reduced total debt to $47.7 billion, bringing debt/capital to 22%, within its targeted range of 20%-25%. Further debt reduction year to date has brought net debt/capital to 13% by mid-2022. Management expects to spend $21 billion-$24 billion in 2022, in line with its long-term guidance of $20 billion-$25 billion annually through 2027. At this level, Exxon estimates it can cover the capital program and dividend, assuming $37/bbl oil and average downstream and chemical margins in 2022. Proceeds from the remaining half of an ongoing $15 billion divestment program should supplement cash flow, as well. There is enough flexibility in the plan to keep the dividend safe in the event that commodity prices are marginally lower than expected. In a higher oil price environment, one does not expect Exxon to increase capital spending but to direct excess cash flow to debt reduction and shareholder returns. After reintroducing share repurchases with a $10 billion plan, Exxon increased that amount to $30 billion through 2023. Dividend growth is likely to resume soon, given the sharp reduction in debt. Shareholder return increases, particularly repurchases, should continue, considering the high oil price environment and guidance for $100 billion in surplus cash flow through 2027 assuming $60/bbl oil.
Bulls Say
- Exxon has responded to shareholder concerns by reducing spending, appointing new board members, increasing disclosure, and announcing emissions reduction targets.
- Exxon will see its portfolio mix shift to liquids pricing as gas volumes decline and new oil projects start production. Cash margins should improve as a result, thanks to Permian and Guyana volumes.
- With coordination between upstream and downstream operations, as well as integrated refining and chemical facilities, Exxon achieves a high level of integration that creates value, as opposed to simply owning the assets.
Company Description
ExxonMobil is an integrated oil and gas company that explores for, produces, and refines oil around the world. In 2021, it produced 2.3 million barrels of liquids and 8.5 billion cubic feet of natural gas per day. At the end of 2021, reserves were 18.5 billion barrels of oil equivalent, 66% of which were liquids. The company is the world’s largest refiner with a total global refining capacity of 4.6 million barrels of oil per day and one of the world’s largest manufacturers of commodity and specialty chemicals.
(Source: Morningstar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.
The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.
The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.