Newcrest – a bargain at these prices?

Editorial director of Switzer
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The gold spot price is edging back up above $1,400 today after a horror time last week, as many dumped the commodity. The price falls obviously had a major impact on many gold stocks, as brokers moved to downgrade the main player in this space – Newcrest Mining (NCM).

Last week Commonwealth Bank cut its rating from Overweight to Neutral and Citi downgraded it to Sell from Neutral. The consensus target price of the eight brokers on FN Arena is $23.85.

The week prior to the fall, Deutsche Bank and JP Morgan had both upgraded the stock to Buy.Opinion on gold, and therefore companies that make a business from digging it out of the ground, as an investment has been divided for centuries. But at these prices – Newcrest trading at just over $16, and at least a 40% discount to FN Arena’s consensus target price – surely the company must be a buy? I asked some of our Switzer Experts for their views. Even gold haters, like Paul Rickard, don’t necessarily dislike Newcrest at these prices.

“I hate gold and have been a bear for the last few years. I just don’t like assets that don’t pay an income stream – or can’t be consumed. Markets always take things too far – in the mid teens, Newcrest is priced to have a good hard look at,” he says.

Fundamental support

Peter Switzer believes the fundamentals will support ongoing demand.

“To me, Newcrest looks like a pretty sound play for the long-term investor, given my view on gold. First, there has been a big sell-off. Next, the Indians and Chinese will never lose their love for it,” he says.

“Finally, Roger Montgomery a few months ago, said his intrinsic value for Newcrest was $15 and people laughed at him, well, the share price is in this neighbourhood right now.”

Roger Montgomery also wants to remind us, in particular the laughers, of his forecast last year.

“I said that I thought it was one of the most expensive gold stocks in the world.  I followed up with an estimated valuation of about $15.00. With the share price trading at double that price and Newcrest being the most widely held gold stock in the superannuation funds of Australian investors, laughter was the only warranted response,” he says.

“But here we are today and the price of Newcrest is at about Montgomery’s estimated intrinsic value. Proof positive that profits come from patience.  The question now of course is, what next?”

The outlook

Yes, what next? Of course the future of the company is dependent on the price of the commodity, but was last week’s dive a blip, or an ongoing trend? Montgomery says it’s important for investors to remember that gold is “a pessimistic trade on inflation and a bet for low interest rates”.

Therefore if interest rates rise, as they are predicted to eventually do as the global economy recovers, the outlook may not be good for gold. Gold has always been a defensive play, something investors cling to in stormy times.

“If you think that Newcrest is good value, you are adopting a view that the price of gold will not fall further,” Montgomery reminds us.

“But keep in mind, at the recent highs, neither the announcement by the Fed of infinite bond buying, nor the developments in Cyprus, nor the doubling of money supply in Japan under ‘Abenomics’, caused the price of gold to rally. This suggested that anyone who wanted to buy gold had already done so and in sufficient quantity.”

Trading at $16.65, Newcrest has a forecast yield of just 2% for FY13 and 2.7% for FY14 but it would never be a yield play. However at these prices, here at Switzer we think it is worth adding to a portfolio.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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