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Newcrest on track for 'Transformation 2', says Citi analyst

Newcrest Mining Ltd.'s success in turning itself from a "quasi-basket case" in 2013 and resurrecting what some have called the "black widow" of gold projects, Lihir, positions the company well to undergo what the Australian miner is internally calling "Transformation 2", Citi Vice President of metals and mining research Trent Allen says.

Sydney, Australia-based Allen, who was a contract geologist with Newcrest from 2001 to 2004, said industry's drive underground with dwindling amounts of gold at surface plays to Newcrest's strength of block caving.

Newcrest CEO Sandeep Biswas affirmed at the BMO Global Metals & Mining Conference in Florida on Feb. 27 that the company planned to apply its block caving expertise to new areas as part of its longer-term strategy over the next 10-plus years.

Over the near-term, Biswas said the company was cranking up mill throughput rates at the Lihir mine in Papua New Guinea to 14 million tonnes per annum and at Cadia in New South Wales to 28 million tonnes per annum.

Biswas noted the better understanding of Lihir's mineralogy enabled Newcrest to "turn the business around" as part of the company's broader transformational change, which also included portfolio simplification and generating new growth options and substantial free cash flow.

However, Allen told S&P Global Market Intelligence that rescuing Lihir had greater implications, saying that some believed the mine to be a potential "company killer" back in 2013, when times were tough for the gold industry more broadly.

The lowest gold reached at that time was US$1,195.57 per ounce on Dec. 19, 2013, the year in which Allen said Newcrest was in "terrible strife", having paid US$9.5 billion for Lihir and lost about half of that in the next few years in write-downs.

Yet Newcrest still finished the 2013-14 fiscal year with all operations free cash flow positive except Hidden Valley, which it sold to Harmony Gold Mining Co. Ltd. at a US$10 million loss in September 2016.

Now it's full steam ahead.

Citi believes that at 100%, Newcrest will produce 2.4 million ounces in the current calendar year, 2.6 million ounces in 2019 and 2.8 million ounces in 2020 before dropping back to just over 2 million ounces in 2021 when it's expected to lose Gosowong which does 250,000 ounces per annum.

Allen believes the relatively high-cost Telfer pit could also wind down by then, while grades at Cadia Hill are also due to fall about that time.

Thus, Allen said, Newcrest was "looking at a hole", or a drop in production, at around that time before Wafi-Golpu comes on around 2023.

"When they talk about transformation, to me it's being transformed from a highly-leveraged company with a big capex spend and a struggling large-scale mine in PNG, to a low-cost miner with free cash flow."

"There has also been some internal changes, particularly around the [environmental, social and governance] side. They had a safety problem a few years ago with fatalities, now they're at zero fatalities."

He also believes Newcrest has changed the way its deals with landholders around Lihir for the better.

Biswas fleshed out Newcrest's five "key pillars" of growth at the BMO conference as safety and sustainability, people; operating performance; technology and innovation and profitable growth.

He said Newcrest wanted five breakthrough successes in technology and innovation and exposure to five tier one ore bodies by 2020, through operations, development projects or equity investments.

On Feb. 25, Newcrest announced an agreement to acquire 27.1% of shares in Lundin Gold Inc., building the Fruta del Norte gold mine in Ecuador, which Biswas said satisfied his company's definition of exposure to a tier one ore body, given the expected long life, annual production and low-cost nature.

"We believe the Americas are home to the type of ore bodies that Newcrest can leverage its capabilities in bulk underground mining and exploration," he said at the conference.

"We've also started building our own exploration portfolio independently within the region, with a number of early-stage entry arrangements such as farm-ins, option agreements and JVs globally that provide the potential for low-cost growth."