Financial Report
Summary of year’s results
Due to the funding requirements for the Telfer project, the 2003/04 year was a significant year for effectively managing Newcrest’s finances. The Telfer funding plan relied heavily on the Cadia Valley mines to generate the cash flows needed at the beginning of the year.
We also established Ridgeway as a quality mine. In less than two years, on an undiscounted basis, cash flow from Ridgeway has fully repaid the capital invested.
The financial highlights for the 2003/04 year are summarised in the following table. Refer to the Discussion and Analysis of the Financial Statements for a detailed review of the current year results.
| 2004 | 2003 | |
|---|---|---|
| Net profit after tax before significant items | $119.3 million | $66.3 million |
| Net profit after tax | $122.9 million | $92.2 million |
| Basic earnings per share | 37.5 cents | 29.6 cents |
| Return on capital employed | 9.0 percent | 6.6 percent |
| Return on members’ equity | 18.1 percent | 10.6 percent |
| Gearing – net debt/net debt + equity | 48.9 percent | 30.3 percent |
| Dividend | 5 cents | 5 cents |
Net profit after tax before significant items rose substantially for the 2003/04 year. This measure is considered to be the best indication of the profitability of the underlying businesses. Newcrest’s increase in profit resulted principally from higher production and lower cash costs assisted by strong copper by-product revenue. Earnings per share and return on equity both rose accordingly.
The commissioning of the Telfer project in the first half of the 2004/05 year will result in significant increases in earnings per share and return on equity for the whole of 2004/05.
Key strategic issues
The financial standing of Newcrest changed dramatically during 2003/04 with the Company positioning itself well for the future with long-life operations, low on the cost curve which will provide stable cash flows for many years.
Particular items of note are as follows:
Due to the relative importance of the Telfer project to Newcrest the financing for the Telfer project necessarily contained some elements of a project financing. This project financing style prevailed due to the perceived completion risks associated with the project and the significant contribution Telfer will make to the overall Group. The financing was completed in March 2003.
By June 2004, the Company’s credit position had been transformed with our effective credit rating and capacity increased dramatically. Newcrest is now well positioned to contemplate a restructure of its existing debt to take advantage of better credit conditions and to establish debt maturities that are more reflective of the long-life reserve profile of the Company. Conditions in key capital markets are presently very favourable and we expect to examine benefits of a debt restructure in the current financial year.
Capital management plan
Proposals to restructure existing debt form part of Newcrest’s larger corporate capital management plan which will address such matters as dividend policy, gearing targets and liquidity.
The Board’s intention is to increase the dividend payout ratio once Telfer is operating at full capacity. Our aim is to establish a sustainable dividend level and to regularly monitor cash availability. We can then determine whether returns to shareholders above the sustainable dividend level can be made, depending on cash availability and investment opportunities.
Current gearing levels remain manageable and gearing has risen as a result of funding the Telfer project. We intend to reduce our gearing to more modest levels and cash flow predictions suggest this can be achieved in a relatively short timeframe. We are seeking to minimise Newcrest’s cost of capital in this process. Once target debt levels are determined we will seek an appropriate mix of long and short-term debt to reflect a repayment profile that complements our business plans.
Restructure of hedge book
A critical piece of our plan to develop the Company’s long-term financial strategy was the restructure of the hedge book, which was completed immediately after year end. We now have a hedge book consisting entirely of vanilla hedging instruments. This restructure now aligns the entire book with the Company’s hedging policy approved by the Board in 2002 and should enable our derivative positions to qualify as hedges under international accounting standards which become effective in 2005.
Newcrest’s hedging policy is to hedge to ensure the return on new capital invested and to ensure that we can meet the Company’s financial commitments in times of low commodity prices. In the next few years, therefore, hedging levels based on annual production rates will remain high whilst debt levels remain high and development opportunities are pursued. Our expectation, however, is that overall, hedging levels will reduce over time commensurate with a reduction in gearing.