Newcrest Mining (ASX:NCM) has been in the headlines over the past couple of weeks, albeit for all of the wrong reasons. Australia’s largest gold miner should be enjoying boom times, after all, Gold, despite its recent slide and currently at $1384 remains at a significantly higher level than its average for the past decade.
Newcrest Mining Restructuring
Newcrest came out last week with a restructuring that will wipe more than $6bn from the value of its mines, claim hundreds of jobs and reduce if not evaporate any dividends for some time to come. With its Brisbane office being closed down and a risk that it’s current Moody’s rating of Baa reduced further (to junk status?) alarm bells have rung and the share price has been shredded.
So where did it go wrong for Newcrest Mining?
Newcrest has invested billions in improving its assets – expanding and upgrading, but the benefits of this will not be realised with mining operations wound back until such times as the Gold price rebounds. With prices lower than the $1800 highs of 6 or 7 months ago, a question that must be posed to the board is “why didn’t you forward sell or hedge your production?” In our Outrageous Predictions for 2013, we discussed our 2013 outlook for gold – you can see more on our outlook here.
The absence of this hedging has proved a very expensive mistake and someone, other than those facing redundancy, needs to be accountable.
Newcrest Mining and Lihir
Newcrest also bought out Lihir, one of most traders’ favourite trading stocks, at a whopping $10bn, back in 2010. The mine would no doubt revalue at a fraction of the purchase price now, comparable to RIO’s ill fated Alcan purchase. In the case of RIO, this ultimately cost Tom Albanese his job – will the same fate await somebody on the board at Newcrest?
Under the spotlight
Notwithstanding the above market related factors, Newcrest seems to have now fallen under the spotlight of market supervision. There have been allegations that this selected Analysts had the inside track to Newcrest’s problems prior to the public announcement. All in all, a week to forget for the miner and share holders, given the $6bn in impairments effectively negate the company’s earnings right back to 2000.
Neutral Calendar Spread Strategy
We have been caught in this price action with a neutral calendar spread strategy, which currently is sitting under water, albeit a relatively small position.
So for those holding stock, what next?
If you haven’t closed out and continue to hold, then a stock repair strategy may be the way forward for you – and if you need help in setting this up, feel free to contact your advisor. The reality is, at these levels, action simply must be taken, rather than waiting to see what’s next – July’s premiums, helped by volatility may make this an interesting and viable get out of jail card – the question is, if you are a board member at Newcrest, do you have a get out of Jail card?