Drop tarnishes gold shares

By Simon Hartley

Oceana Gold caught in slipstream after giant Newcrest Mining sheds $10.7b in value.

Shares in the largest gold producers here and in Australia have plunged dramatically. Photo / Oceana Gold
Shares in the largest gold producers here and in Australia have plunged dramatically. Photo / Oceana Gold

Shares in New Zealand and Australia's largest gold producers have bombed in recent weeks, with Australian giant Newcrest Mining shedding A$9 billion ($10.72 billion) in share value during the past year.

East Otago-based Oceana Gold shares on Friday hit a year low, trading around $1.90, before closing at $1.98.

At that price, Oceana had shed more than half of its value from its high of $4.50 in late October, falling from $1.32 billion to $563 million.

However, Newcrest shares had hit a year-high of A$29.97 before falling to a year low of A$11.40. On Friday, Newcrest was trading around A$11.66.

Newcrest's share value had been slashed 51.6 per cent during the past year, or A$9 billion, and was valued at A$8.84 billion on Friday, Craigs Investment Partners broker Peter McIntyre said.

"There's been a complete loss in investor confidence with Newcrest. It was once the shining light of the [resource] sector," McIntyre said.

With resource investors likely to be holding stock in a number of companies, Oceana's decline was more of a "follow the leader" decline.

"There's nothing specific driving Oceana's price [down]. Newcrest have numerous issues to contend with," he said.

Spot gold had slumped from a high of US$1795 last October to US$1321 in mid-April, but for the past five weeks it traded in the upper US$1300s range and was at US$1389 yesterday.

Newcrest's cost of production had "blown out" to beyond A$1000 an ounce and after its A$10 billion takeover of rival Lihir Gold in 2010, it was having to write down about A$3.6 billion on that asset, he said.

However, Newcrest's woes are wider.

The Lihir writedown is part of a bigger A$6 billion asset writedown the company announced on Friday, along with the closure of its Brisbane office.

AAP yesterday reported Newcrest had come out swinging against allegations it breached market rules and tipped off analysts ahead of last week's massive downgrades.

Investment banks including UBS, Citi and Credit Suisse downgraded their investment views on Newcrest last week, citing massive profit and production cuts which led to a plummeting share price before the A$6 billion writedown announcement.

The magnitude of the writedown had shocked most people. CMC Markets chief market strategist Michael McCarthy said the amount of the writedown was staggering and represented all of the company's earnings since 2000.

He said the company should have protected profits by hedging and locking in gold sales when prices were at record levels, through put options and forward sales as insurance.

McIntyre noted all major gold producers had moved away from hedging contracts when the gold price kept rising on the daily global spot market.

McCarthy said Newcrest's cash costs were officially below $1000 an ounce of gold but actual production costs are estimated to be well above that, including royalties, exploration and a range of other expenses.

This year, Oceana's production costs have been put at between US$650 and US$800 ($801 and $986) an ounce, which include credits from offsetting production costs, from mining and selling copper, the latter from its newly commissioned mine on the island of Luzon, in the Philippines.

- Otago Daily Times

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