Newcrest Mining (NCM) shares were whacked yesterday when it became clear the chances of the company making this year’s guidance for gold and copper production all but disappeared because of much worse than thought problems at its big Cadia mine in central NSW.
The shares slid 7.6% to $12.72 on the news of the continuing problems at Cadia and a key milling operation. The update was delivered to the market hours before the annual meeting was held.
The SAG mill (a key crushing operation) at the Cadia mine in NSW failed about 12 days ago, and Newcrest said it would be “at least five weeks” before it was fixed.
The mill in question handles 70% of ore produced at Cadia, and while a second smaller mill exists on site, it is too small to process all the mine’s output each day. So as a consequence, the mine’s production looks set to be dramatically lower for the December quarter at least.
Newcrest was already behind the run rate required to meet full year gold production guidance after a September quarter that was dogged by two fatalities and other mechanical problems at Lihir and at a mine in PNG.
The prospect of a weak December quarter means the company may be forced to trim its guidance, but the company remains confident the lost output can be made up.
“It is too early to define any impact on FY16 production and cost guidance,” the company said in a statement, but investors yesterday had already made their minds up on this development.
The meeting was told the same message by CEO Sandeep Biswasi who explained the problem this way: “On Saturday 18 October 2015 a problem was detected with the motor on concentrator 1 SAG mill. The mill was taken offline for inspection by engineers,“ he told the meeting.
"The inspection has revealed more loose windings than initially anticipated. A repair and remediation plan is currently being developed. In the interim the concentrator 1 SAG mill will remain offline for at least the next 5 weeks. Concentrator 2 SAG mill continues to operate at full capacity with ore from Cadia East being trucked to this mill.
"To reduce the impact on production a conveyor is being installed to transport ore from the high pressure grinding rolls to the ball mill circuit, bypassing concentrator 1 SAG mill.
“It is anticipated that construction will take around 6 weeks.
"It is too early to define any impact on FY16 production and cost guidance. Newcrest will update the market once a repair and remediation plan is complete,“ the meeting was told.
There was no mention of the costs involved in these changes either, or the anticipated loss of production or revenue this quarter. That probably won’t come to around Christmas, so it could be bad news.
Cadia is a major asset now and for the future for Newcrest. Over the 2015 financial year, the company continued to ramp-up production from Cadia East “which was supported by strong performance by the Ridgeway mine,” according to the company.
"Gold production at Cadia increased by 13 per cent and copper production at Cadia increased by 22 per cent.
"All In Sustaining Costs were 31 per cent lower year on year, at 206 US dollars per ounce for the 2015 financial year.
"Our application to increase the Cadia processing plant permit from its current 27 million tonnes per annum to 32 million tonnes per annum was approved by the NSW Government in September 2015.
"A study has commenced to determine the most cost-effective way forward in relation to this plant expansion. Any increase to production capacity and the associated capital requirement is subject to completion of the study, as well as Newcrest Board approval. Cadia is a world class asset that generates strong free cash flow,“ the meeting was told.
So there is a lot riding on not only this expansion, but the temporary fix to bypass the current problem and the impact of the lost mining on production and earnings for the current half and full financial year.
