Feeling the heat of plunging gold prices, Australia's leading gold miner Newcrest Mining Ltd said yesterday that the company will take $5 to $6 billion in impairment charges in the current year related to its investments in gold assets in Papua New Guinea (PNG), Australia and Africa.
In its review of the the business plan and budget for the next financial year up to 30 June 2014, Newcrest said that next year's outlook is impacted by the recent deterioration in the gold price, a strong Australian dollar, and increasing costs.
Gold price has fallen 23 per cent from last year's high of $1,792 an ounce to $1,386 an ounce yesterday in London, after registering its biggest two-day drop in three decades in mid-April.
Under the new business plan, the company's free cash flow is budgeted to be neutral in 2014 financial year and expects it to be positive in the subsequent years, based on current metal prices and exchange rates.
To achieve the target, Newcrest, has decided to cut its capital expenditure plans and significantly reduce exploration expenses besides adopting cost-cutting measures across all operations, and reducing expenses on corporate office and support functions.
The capital expenditure has been slashed by a third to $1 billion from $1.5 billion.
As part of the measures, Newcrest will close its Brisbane office and cut around 250 jobs. The company expects to achieve a 20-per cent reduction in corporate spending next year.
A major chunk of anticipated write-downs, about $3.6 billion, is related to Lihir mines in PNG which Newcrest acquired in 2010.
Approximately $2.2 billion of impairment is on account of higher cost assets namely Telfer gold-copper mines in Western Australia, Hidden Valley gold and silver mine jointly operated by Newcrest and South Africa's Harmony Gold Mining Co, and the 90-per cent owned Bonikro gold mine in Ivory Coast.
Newcrest said that the impairment will have no impact on its cash flow, but it will impact the 2013 financial year accounting due to reduction in asset book values.
The 2014 outlook estimates gold production in the range of 2-2.3 million ounces, the mid-point of which is about 4 per cent higher than this year.
Newcrest said that it plans to spend $350 million for expansion of its lower-cost Cadia Valley operation in New South Wales, which underpins the company's future growth plans. The balance of the capital expenditure will be spent on Lihir and other projects.
Exploration expenses will be cut from its current level of $160 million to around $85 million.
Its one-off costs related to restructuring of the group are estimated to by $50-$75 million.
The company expects its gearing to go up from an earlier declared target of below 15 per cent to 21 per cent at 30 June due to decline in gold prices, which will further go up to 28-30 per cent as a result of$5 to $6 billion in asset write-downs.
Melbourne-based Newcrest is one of the world's top five gold mining companies, engaged in production and exploration activities. It has operations in Australia, the Pacific Region, Asia and Africa.
Further to the news, Newcrest shares have fallen 7.6 per cent to close at $12.35 yesterday on the Australian Stock Exchange, its lowest level in nine-years. The shares have plunged 20 per cent in the last three days, and almost 50 per cent since the beginning of the year.
The company's market value has eroded by a third to $9.5 billion, compared to $30 billion two years ago.