About: Newcrest is the largest gold producer listed on the ASX and one of the world's largest gold mining companies. Newcrest has mining operations in Australia, Papua New Guinea and Indonesia. The company is also a substantial producer of copper.

Why it’s in the portfolio: Newcrest provides the portfolio exposure to one of the highest quality, low-cost gold producers listed on the ASX. Newcrest has gold reserves representing a mine life of more than 25 years at current production rates. In addition, Newcrest now trades on a more compelling valuation when compared to peers and has a strong balance sheet with further growth option. We also expect gold to perform well in periods of volatility or if inflation fears were to ramp up, providing the portfolio with a partial hedge to certain turbulent scenarios. As it stands, The price of gold denominated in Australian dollars is at an all-time high (aprox. $2000 per ounce). This is a function of both gold prices (in US Dollars) reaching their highest level since 2014 and a depreciating AUD. Importantly, our holding in NCM is not contingent on high gold prices. Concurrently to rising gold prices, Newcrest’s multi-year forward P/E ratio has risen modestly from its long-term average of 21x to 22x. This compares very favourably to other ASX listed gold miners (Northern Star, Saracen, Evolution Mining) whose share price appears to be more leveraged to gold prices.

Fundamentals: Newcrest trades on 1-year forward price to earnings ratio of 27x, a price to book ratio of around 2.1x and has a relatively low gearing of around 17% debt-to-assets. Newcrest currently has a fully franked gross dividend yield of around 1.5% on a payout ratio of around 27%.

What could go wrong? The common factors that impact the performance of resource stocks such as Newcrest are the fluctuations in the commodities in which they operate (price, currency), the level of production (volume), the cost to dig the resource out of the ground (costs), and the level of capital expenditure required to establish and keep the mine(s) going (capex). The other factors that could impact Newcrest are mine specific risks such as environmental or operational issues that can impact production or the cost profile of production. Mine specific risk is Sovereign or regulatory risks may also impact Newcrest given their overseas operations or domestically political pressure can be an issue as governments try and extract greater royalties/taxes from mining companies. Exploration risks are also worth noting as exploration may not always be successful after incurring the cost for exploration.