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14 July 2020 | Buy

Newcrest: As governments keep pumping cash, inflation might just pop

BUY (blue chip) - Newcrest: As governments keep pumping cash, inflation might just pop

Newcrest Limited (NCM:ASX)) is Australia’s largest, and one of the world’s, most significant gold producers, with annual production slated to exceed 2 million ounces in 2020.

Gold has historically proven to be a high-quality hedge against inflation and a safe haven in times of market uncertainty and stress. With markets having now recovered significantly off their lows, and COVID-19 and economic uncertainty remaining very high, we see a benefit to adding some ‘insurance’ to your portfolio, covering both ends of the sentiment spectrum (i.e. return to market fear and also a positive outcome in which conditions recover faster than expected, spurring inflationary pressures).

One key differentiating feature of the recent global crisis has been the emphatic and unprecedented response by global central banks to cut interest rates and stimulate activity through unconventional policy like Quantitative Easing (QE or money printing). We believe this action is likely to continue and even accelerate, as evidenced by comments from the US Federal Reserve Chairman, Jerome Powell, pledging further support, and moves by the Reserve Bank of New Zealand – a country that has arguably escaped the worst of the pandemic – to massively increase its QE program. While swift and material action by central banks has certainly reduced near-term downside risk in markets, the apparent debasement of monetary prudence adds to the risk of ‘over-doing it’ and potentially fuelling inflation down the track.

From a company specific perspective, Newcrest is the largest and most diversified operator on our market. The company recently released disappointing quarterly production figures across all of its key mines, however, the challenge of mining gold and forecasting output levels is something all miners struggle with due to the concentrated nature of deposits rather than evenly disseminated ores seen in other metals. We think the ‘low’ point of disappointing operational performance in the March Quarter offers a good entry point for the stock and we expect better performance in the final quarter of the year as under-performance on grades is caught up. We note that Newcrest maintained its Full Year production guidance despite the poor quarter, adding to our confidence in the period ahead.

Finally, Newcrest has very recently raised capital from investors to both strengthen its balance sheet and to acquire an economic interest in another high-quality gold operation for approximately $100m less than its book value. This should help support earnings and leaves the company in a stronger financial position to take advantage of other opportunities which may arise amidst the current turmoil.

Read our recent Sector Update on Gold here.