2nd UPDATE: Newcrest 3Q Gold Output Falls But Exploration Results Impress

Newcrest Mining Ltd. (NCM.AU) posted a drop in third quarter gold production Thursday and downgraded production guidance for its Hidden Valley operation in Papua New Guinea for a second time.

But while the production results came in below market expectations, analysts were more impressed with positive exploration results at the miner's Wafi Golpu joint venture with Harmony Gold Mining Co. Ltd. (HAR.JO), also in PNG.

Newcrest was keen to highlight its suite of exploration projects and an expected improvement in output in the fourth quarter as it sought to bolster the case for its A$9 billion plus share and cash takeover offer for rival Lihir Gold Ltd. (LGL.AU).

Third quarter gold production was 416,651 ounces, down 6% on the second quarter but still up 14% on the previous year due to expansions, while copper output fell 12% on year to 20,598 tons.

Output at Newcrest's flagship Telfer mine in Western Australia state was down 17% on quarter to 152,495 ounces due to lower grades in the open pit and the Ridgeway mine in New South Wales state produced 40,894 ounces, down 22% on the previous quarter.

The Melbourne-based miner said most of its operations had produced in line with expectations but that commissioning issues at Hidden Valley had hampered production there.

Newcrest cut guidance for full year output from Hidden Valley to 65,000-75,000 ounces from previous guidance of 75,00-85,000 ounces, which was already a downgrade from original guidance of 110,000-125,000 ounces.

As a result, Newcrest said overall guidance across its operations was now expected to be at the lower end of the previous guidance range of 1.81 million-1.91 million ounces of gold, with probable outcomes of 1% above or 3% below 1.18 million ounces.

Credit Suisse analyst Michael Slifirski said in a client note that the third quarter output had been weaker than expected and that Newcrest would need a much stronger fourth quarter to meet its full year guidance.

Newcrest Chief Executive Ian Smith said the issues at Hidden Valley had mostly been resolved during the third quarter and the company expected higher output across its mines in the fourth quarter.

"We are expecting significant production increases in the June quarter with an expectation of production being in excess of 500,000 ounces," he told analysts.

Full year copper guidance of 85,000-90,000 tons was maintained and Newcrest said costs for the year were expected to be at the lower end of the guidance range.

Newcrest said recent exploration drilling at its Golpu joint venture with Harmony Gold had extended the size of the deposit materially and indicated that grades are increasing with depth.

Drilling at the project continues with a resource estimate due in the fourth quarter and Newcrest said the exploration target now exceeds 20 million ounces of gold and 4 million tons of copper for the Wafi Golpu region and could go higher.

Credit Suisse said the exploration results were exciting and pointed to the potential for the development of a significant block cave mining operation.

Smith spent much time on the analyst call talking up Newcrest's suite of exploration assets, with the miner going into hard sell mode to convince Lihir and its shareholders of the value of the shares component that makes up the bulk of its bid.

Lihir has rejected Newcrest's offer of one of its shares for every nine Lihir shares plus 22.5 Australian cents per Lihir share.

The takeover target has appointed Macquarie and Greenhill Caliburn to explore a "range of strategic alternatives" and has set up a data room for potential rival bidders, according to a person familiar with the situation.

Amid speculation that Newmont Mining Corp. (NEM) may be running the ruler over Lihir, Newcrest this week sent an open letter to Lihir Chairman Ross Garnaut asking that Newcrest be given access to the same level of due diligence as any potential bidders.

Smith said Newcrest has not yet had any confirmation from Lihir Gold that it has been approached by other parties seeking to undertake due diligence, but he was sure Newcrest would be granted the same access as any other parties.

Newcrest shares were lower in the wake of the third quarter report, and were down 0.2% to A$33.90 at 0446 GMT while target Lihir was trading down 0.3% at A$3.91 in a broader Australian market down 1.0%.

- By Alex Wilson, Dow Jones Newswires: 613-9292-2094; [e-mail]