Newcrest's Challenges Mount as Gold Loses Luster

   By Rhiannon Hoyle 
 

SYDNEY--Newcrest Mining Ltd. (NCM.AU), a one-time darling of Australia's share market, has been stockpiling more than just ore at its gold mines in Australia and Southeast Asia of late. The challenges facing its management are mounting, too.

The Melbourne-based company's disclosure practices are being probed by Australia's securities watchdog, its chairman and chief executive are preparing to exit, and analysts think slumping gold prices could force it to raise around 1 billion Australian dollars (US$953 million) in new equity.

In the latest blow Thursday, the company unveiled a A$120 million tax bill to settle claims tied to past research and development.

Newcrest's shares have lost 70% of their value since October 2011 to hover near a decade-low, giving the company a market capitalization of A$7.82 billion. The fall in its stock is deeper than rivals like Goldcorp Inc. (GG), Barrick Gold Corp. (ABX) and Newmont Mining Corp. (NEM).

Gold miners have been forced on to the back foot by a sharp slump in the price of the precious metal since the start of the year. Spot gold prices are down by around 25% as the U.S. economic recovery gathers steam and investors preempt a tapering of the Federal Reserve's bond-buying program, which spurred record demand for the so-called safe haven in recent times.

To protect profits, mining companies have slashed spending on searching for new mineral deposits, closed mines and laid off workers.

Newcrest Chief Executive Greg Robinson said the company's mines had performed better than expected in the three months through September. Costs in the quarter had dropped by 15% compared with last year's average, after management cut spending and narrowed focus to ore that could be mined more cheaply,

"Further levers are available to the company should the gold price decline further," he said in an emailed statement.

Investors took a different view to Newcrest's performance. Shares in the company closed 0.6% lower in Sydney Thursday, underperforming the broader market, which was up 0.4%.

"The board needs to be restructured, operating performance needs to improve and the debt is too high," said Tim Schroeders, a Melbourne-based fund manager at Pengana Capital, who sold his Newcrest stock this year. "The stock attracted a premium rating that was unjustified."

Newcrest's troubles stretch beyond the falling gold price. Operations at its mines have been disrupted by factors ranging from mechanical breakdowns to heavy rains, triggering repeated downgrades to its production guidance in recent years.

It has also been engulfed by controversy over the way it disclosed details of a business review flagging more than A$6 billion in writedowns in June--just days after several banks slashed their outlook on the company. An independent review commissioned by Newcrest found no evidence of serious misconduct when it reported its findings last month. However, the Australian Securities and Investments Commission, the country's corporate watchdog, is continuing to investigate.

Concerns around its disclosure practices led Institutional Shareholder Services Inc., an independent proxy voting and corporate governance advisory firm, to call for shareholders to vote against the reelection of three directors.

Against this background of shareholder activism, Newcrest unveiled plans earlier this month to overhaul its top ranks. Chairman Don Mercer is to retire within months and Mr. Robinson is due to stand down as chief executive next year. Mr. Robinson is expected to be replaced by incoming chief operating officer Sandeep Biswas, former chief executive of Pacific Aluminium, a unit of Rio Tinto PLC (RIO).

Jo Battershill, a Sydney-based resources analyst at UBS AG, recently said Newcrest may need to raise as much as A$1.2 billion to get its gearing--or debt-to-equity level--down to a more investor-friendly 20%.

In a move that may allay concerns about a potential issue of new shares, Newcrest said Thursday it had agreed new loan facilities totaling US$450 million.

"We have the capacity to take on more debt [but] our strategy is to reduce overall levels of drawn debt," said Gerard Bond, Newcrest's chief financial officer. "It gives us insulation from any anxiety if prices were to fall sharply."

Write to Rhiannon Hoyle at [e-mail]

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