Friday, December 19, 2008

About Newcrest, the Gold Mining Company...

Chan David Brother Law, sorry that maybe I cause you lose money on your put bet. Wish that you remembered to limit your bet.

One thing, I have just read Newcrest in more details. Although it claimed that it has cleared its hedgebook, it still has a gold put contract in effect delivering 500,000 ounces/year for 4.5 year with strike at AUD800/ounce. In a sense it protects its downside risk. But with its huge gold reserve (about 55m ounce) and a large capacity (2m ounce/year for now), its remaining stock of gold will still be affected by the fluctuation of gold price. By such observation, and that gold price will drop back due to the strong performance on bond market as well as Newcrest's price has hit recent high, brother Law may still hold for a while (maybe to next year) if the price of your contract has not dropped below your stop-loss point. 12月19日 14:13

Chan David Lets play some fantasy again, Brother Law.

Some financial data of Newcrest:ROE = 6.481%
P/E at current price = 102
Financial Leverage = approx. 1.5

Now first method to play with.

Given that ROE is 6.481%, if we assume compound interest growth (all ROE re-invested), then it will take about 11 years to break-even the initial invesmtent (double the value of the initial investment). Meanwhile, the actual P/E is 102. For the current market price to be rationalized, the EPS must grow by 102/11 = 9.27 times. Now as it has a financial leverage of 1.5, the actual increase on profit is 9.27/1.5 = 6.18 times. Assume a back-to-back rise between earnings and gold price, it means gold price has to grow by 6.18 times from its current settlement price 975AUD/ounce to 6027AUD/ounce (or 670USD/ounce to 4143USD/ounce) . Even if we assume that it grows steadily in another 11 years (break-even period of the company's investment), it still means a consecutive 11 years growth compounded at 18% annually. Can it be real?

Lets take another scenario. This time we do not use the reverse of ROE to compute the "reasonable PE". By practice usually a gold mine will have 30-50 years right of mining, and the half-life (usually the break-even period) is around 18-20th year. Now lets take 20 as the reasonable P/E and believe that a lost of value of USD will be 5%/year and an appreciation of gold value will be 15%/year, together a total of appreciation of value of 20%/year. Now by usual practise we made a five year forecast to calculate the value of earnings. By 5 year, the future value is 2.49 times of the current value.

Assume we all believe such bull market and has already rushed to the market to buy the stocks and drive it high. At most the reasonable price (at par to the future value) is 20x2.49 = 49.78 times of P/E. Now its P/E 102 times.From the above estimation, plus that actually the bond market is still strong and the confidence on fiat money has not completely lost yet, the current price of Newcrest is more like a rebound after over-sold. Combining with the technical analysis, an adjustment has a great chance to come.Just my 2 wild thought... 12月19日 15:48

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