Newcrest Mining (NCM) is an Australian gold producer, with operations in Australia, Indonesia, Papua New Guinea, Fiji and West Africa.

The group's flagship mine is PNG-based, Lihir, with the other offshore operations being Gosowong in Indonesia, Hidden Valley (50%-owned) in PNG and Bonriko in Ivory Coast.

NSW-based Cadia Valley and WA-based Telfer make up the company's domestic operations.

Gold weakness

Although gold prices have stabilised in recent months, gold exchange traded funds (ETFs) have continued to shed their bullion holdings, highlighting weak investment demand for the yellow metal.

Last Friday night's better-than-expected US jobs report has increased the likelihood of the US Federal Reserve bringing the forward the date it begins tapering stimulus to December.

The market response will likely be a rise in US bond yields and the US dollar, both of which are negative for gold.

This reduces the incentive for ETFs to hold bullion and if they continue to sell their holdings - which we expect they will – gold prices are likely to head south.

Outlook

NCM's cash costs for the September quarter were $1093 an ounce (oz), whilst the average realised gold price was $1442/oz.

With gold prices recently trading around $1285/oz that implies NCM's cash margin has shrunk by approximately 44% since the end of the quarter, to $192.

It also means that Lihir, with a cash cost of $1152/oz, Telfer, with a cash cost of $1296/oz and Bonriko, with a cash cost of $1889/oz, have either become uneconomical or are very close to it.

The balance sheet worsened considerably in FY13, with the net debt to equity ratio soaring from 14% to 41%.

High costs and falling gold prices are hammering the group's cash flows, limiting its options to arrest the balance sheet deterioration. This increases the odds of a capital raising.

NCM stuck to its FY14 production guidance of 2.0 - 2.3 million ounces. Unfortunately, it is mining lower grade ore from its gold mines, as evidenced by the September quarter production report.

A repeat performance in subsequent quarters increases the risk of missing production guidance. Amidst all these concerns, we think there is enough bad news to send NCM shares even lower from current levels.

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