Returns the golden rule for Newcrest chief Sandeep Biswas
After a six-year stint leading Australia’s largest listed gold miner, CEO Sandeep Biswas has Newcrest where he wants it.
After a six-year stint leading Australia’s largest listed gold miner, CEO Sandeep Biswas has Newcrest where he wants it, positioned for growth with a goal to be the world’s lowest-cost gold producer.
It was not always so. Early in the Biswas term the blue sky for the miner almost looked to be closing in. That has changed with new growth projects, but in any case the Biswas story has always been about value.
“The whole investment philosophy of Newcrest is to generate returns to shareholders,” he says.
“There is this peculiarity in the gold industry where ounces are deemed more important than actual margin. Prior to gold I came from real businesses where you had to make a profit and free cashflows and I’ve been running Newcrest like that since I joined.”
Today investor interest is in four growth projects: Red Chris in Canada, expansion at Cadia in NSW and Lihir in Papua New Guinea and a new development at Havieron in Western Australia which is close to Newcrest’s ageing Telfer mine.
The CEO says his time at Newcrest can be split into three: first between 2014 and 2017, fix the company; then run the asset as hard as you can, generate free cashflow, deleverage the balance sheet and start investing in potential growth options.
“That’s the period we bought into Red Chris, we farmed into Havieron, we laid out the life of mine for Lihir and for Cadia and we invested in Ecuador, also a tier one asset. And this year we also sold off our investment in Hidden Valley in PNG, we divested from Gosowong in Indonesia and we got out of Cote d’Ivoire.”
The third phase is to build the strong balance sheet to grow a narrow set of world class assets to their full potential – in two of which the miner has no idea of the full upside. “Red Chris and Havieron, those ore bodies have yet to be defined. We are still drilling those ore bodies out to find out how big those ore bodies are and what the ultimate size will be.”
The market took Newcrest’s quarterly update on Thursday in its stride. Full year production guidance was confirmed of 1.8 million and two million ounces of gold and 125,000 to 130,000 tonnes of copper. First quarter production actually fell 21 per cent over the previous year’s quarter after largely seasonal maintenance work at the flagship Cadia mine in NSW and at Lihir in PNG.
Far more significant this month were the pre-feasibility studies at Red Chris in Canada, Lihir, Cadia and the new development at Havieron where Biswas has shared plans on how he sees the miner growing organically to deliver dramatic operating cost gains and strong returns.
“Each one of our assets has a go-forward plan, and each of the investments have a 16-plus per cent internal return,” he says. “At spot prices, it is north of 20 per cent. What you will also see over the next 10 years is a decline in our costs by half, a $US500 ($665) all-in sustainable cost which is a few hundred dollars better than the next best. There is no other company of our size with that profile anywhere in the world.”
That compares with the September quarter figure of $US1270 per ounce ($1690), which was higher than normal due to the lower output. But compare that $US500 figure to the current spot price of gold at over $US1700 ($2260).
“Although our ounce profile at the moment stays around that 200 million ounces, margin is increasing. Growth to me is about margins and free cash; it’s not just about ounces. We are stabilising the ounces but generating far more revenue from those ounces.”
Part of the cost story comes through Newcrest’s skill in “block caving” at the vast Red Chris mine site which the miner says has a net present value of $US1.28bn. Block caving is an underground hard rock mining technique developed quite recently. The ore body is effectively undermined and progressively collapses under its own weight.
Only four companies in the world are capable of block mining: American copper company Freeport, Chilean copper miner Codelco, Rio Tinto and in gold, Newcrest. Biswas says that even among the four, none has the lift height and size of block cave that Newcrest has built.
“When you have big blocks like porphyry deposits which are typically gold copper/copper gold, below a certain grade you can’t mine them efficiently any other way, this is where block caving comes in. The dollar per tonne from block caving is an order of magnitude lower.”
Gold miners have enjoyed recent high gold prices and now there are rumbles around rising global inflation which should also be good for gold.
“Bring it on, but we’ve been hearing about inflation coming since the GFC – this flood of money entering the market and inflation will be rampant,” says Biswas. “We never really saw that so I’ll be very interested to see if it actually materialises on this occasion.”
Newcrest’s strategy to increase the amount of copper it produces from the current 80/20 to 70/30 gold to copper will make the miner less sensitive to the gold price. The shift will also lower all-in costs and put Newcrest firmly into the energy transition supply chain.
Biswas says ESG is front and centre in every investor discussion, a huge change from even a year ago, but at this stage there is no pressure to go harder. Newcrest has a net zero 2050 target, and on track to meet its initial 2030 targets. An internal task force is now looking at how the 2050 target will be reached, mine site by mine site.
“What investors are interested to hear next on 2050 is how are you going to get there, because our mines will actually be running in 2050,” says Biswas. “Despite all the arm-waving going on, ultimately only technology will get us to net zero. We are very innovative and technology-based but we won’t be investing in these solutions ourselves. We have got to work across the industry and between other industries to bring the right technologies to our business to get there.”
Political risk remains with one proposed development in particular. When Biswas started at Newcrest, Wafi Golpu in PNG was set to be the next big growth project. Despite a 25 year successful operation at Lihir, a new agreement between the miner and the PNG government has proved elusive.
“The question for Wafi Golpu will be: can we get an agreement that makes sense for both parties? And it may not. But if we do agree one and get it documented and gazetted properly, there is very strong likelihood that they will honour the agreement because they always have.”
It is not often that a CEO is around long enough to drive a turnaround, a stabilisation and then a growth phase. Asked when he feels his job will be done, Biswas says the curves will demonstrate themselves. There are more drilling results running for Havieron and Red Chris and other plans afoot in the growth phase.
“I’ll know when my job is done when Newcrest has a growth profile that it can do purely organically. There is always M&A and that gets talked about. You never want to have to do M&A. You only want to do it when it suits you.
“To have the ability to do that, you need a pipeline of projects right from exploration through to construction so you continually move projects through that are generating the sorts of returns that these projects are. That’s the philosophy behind setting up a business for the long term. And once I know that that is well stocked, what more is there left to do other than play golf and go fishing?”
