Newcrest to take $6B writedown, cut office jobs

Newcrest Mining (NM-T, NCM-A), joining a growing list of miners that have been rattled by the recent dip in commodity prices amidst escalating costs, intends to slam the brakes on spending and swallow up to A$6 billion ($5.8 billion) in writedowns, leaving investors reeling and its share price at a nine-year low on the Australian Securities Exchange.

Following a recent business review, Australia’s largest gold producer plans to shutter its Brisbane support office and reduce staff at its Melbourne corporate office, cutting 100 positions and bringing the number of employees it will let go this year to 250. But the move will help the company — which is struggling with lower cash flows — reduce its corporate costs by 20% in 2013–2014. 

The miner cites declining gold prices, the strength of the Australian dollar relative to the greenback and swelling costs as the main culprits for the review that also led it to revise the book value of several assets.

Newcrest anticipates taking up to a A$6-billion impairment charge, including writedowns of A$3.6 billion at its Lihir gold operation in Papua New Guinea (PNG) and a total of A$2.2 billion at its higher-cost gold assets, namely Tefler in Western Australia, Hidden Valley in PNG and Bonikro in Côte d’Ivoire.

The impairment charges will be final once Newcrest wraps up its asset review, noting the writedowns will not affect its cash flow but will materially impact the 2012–2013 statutory accounts.

To boost its liquidity Newcrest has tightened its budget for the 2014 financial year, cutting capital expenditures to A$1 billion from A$1.5 billion previously, where it will focus on finishing the Cadia East panel cave 2 project in New South Wales, and expanding the Lihir mine.

Exploration costs have been lowered to A$85 million from A$160 million previously.

Newcrest estimates that these measures will help it become cash-flow neutral at current metal prices and exchange rates in 2013–2014, and cash-flow positive in the following years.

Implementing the changes associated with the review should cost around A$50 million to A$75 million, but the ongoing annual savings generated from them should surpass that one-time cost, Newcrest says.

Gearing levels, which the company aimed to keep below 15%, is projected to increase to 28% and 30% following the writedowns, but should improve once cash flow increases, allowing the company to reduce its long-term debt.

With the cost-savings being implemented, the company doesn’t expect to pay a final dividend for the 2013 financial year.

 But on a slightly positive note, it projects gold production in 2013–2014 to total 2 million to 2.3 million oz., marking a 4% increase over 2012–2013.

On the writedown news Newcrest closed June 7 in Toronto down 7.1% at $13 per share, and in Australia off 7.5% at A$12.35.