World’s Best Mining Debt Defies Gold Woe in a Volcano – by David Stringer and Benjamin Purvis (Bllomberg News – July 27, 2014)

Newcrest Mining Ltd. (NCM) bonds are delivering the best returns this year among metal producers even as the gold miner prepares for new writedowns at a floundering asset inside an extinct volcano.

Debt securities issued by Australia’s biggest gold producer returned 24 percent this year through July 25, compared with 15 percent for the world’s largest extractor Barrick Gold Corp. (ABX), according to a Bank of America Merrill Lynch index of dollar notes sold by investment-grade miners. Falling costs have buoyed the company, which last week flagged a charge of as much as A$2.5 billion ($2.4 billion) mainly on its Lihir mine in Papua New Guinea.

While the writedown may raise Newcrest’s gearing by as much as 6 percent, the miner forecasts cash flow will stay positive after production costs fell 8 percent in the three months to June 30 and gold rose 3.4 percent. Output expenses have been helped by a decline in the Australian dollar, which averaged 10 U.S. cents less in the first half than it did in the same period a year earlier. For every one-cent drop in the Aussie, earnings before interest and tax are boosted by A$28 million, the Melbourne-based company said in February.

“Cost-cutting initiatives and the recent move in the Australian dollar have provided some relief,” Tariq Chotani, a credit strategist at Commonwealth Bank of Australia in Sydney, said in a July 24 interview. “The company’s plan to reduce capital expenditure has also been a credit positive overall.”

Action to cut jobs, trim exploration and crimp project budgets has lowered Newcrest’s all-in-sustaining costs, a measure that includes spending on production, administration, capital and exploration, to A$976 per ounce of gold in the 12 months through June, down 24 percent on the previous fiscal year, it said last week. The miner also exceeded a fiscal 2014 output target of 2.3 million ounces by nearly 100,000 ounces.

Newcrest’s bonds have outperformed larger peers, ranking top in the Bank of America Merrill Lynch gauge, which has returned 8.5 percent in 2014 as global yields have fallen and credit spreads narrowed. The company has two $750 million bonds outstanding, maturing in 2021 and 2022, and $500 million of debentures due in 2041, according to data compiled by Bloomberg.

“I think the bonds will continue to be relatively well supported,” Anthony Ip, a senior credit analyst at Deutsche Bank AG in Sydney, said in a July 25 interview. “They are quite attractive relative to their North American peers such as Newmont, Barrick and Goldcorp.”

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