Newcrest Mining’s (ASE: NCM, OTC: NCMGY) principal product is gold, which it mines mainly in Western Australia through its Telfer and Boddington projects. It also has projects in New Guinea, New South Wales, Ivory Coast and Indonesia that are expected to add considerable volume to future output.

The massive floods that struck Australia in recent months have taken their toll on production. Output for the fiscal third quarter ended March 31 fell by 16.3 percent from the second quarter to just 604,791 ounces. That was below most estimates. But output was still 45 percent more than last year’s tally, thanks to the successful acquisition of Lihir Gold, which holds massive reserves in New Guinea. The company also produced 20,000-plus tonnes of copper, on target for full-year projections of between 75,000 and 80,000 tonnes.

The shortfall in third-quarter output has triggered similar reductions in full-fiscal year projections (end June 30). But assuming some return to normalcy in coming months, that should quickly become a bad memory on the way to surging earnings–and a much higher stock price. Returns to US investors should be further augmented by strength in the Australian dollar, which itself is a beneficiary of higher global prices for natural resources.

In New Guinea, for example, the past year’s shortfall was largely due to the lowest rainfall in 15 years, which prevented full operation of a major processing plant. Troubles in Africa were largely due to unrest in Ivory Coast, which is now coming under control. Meanwhile, Australia is moving out of the rainy season at last, which should increase production.

As for new projects, the company’s Cadia East in New South Wales–delayed by rain–has completed its engineering with “all major equipment and contracts” awarded, Newcrest’s CEO Ian Kingsley Smith said in a mid-April conference call. He added that the Bonikro project in Africa is on its way toward achieving resources “in excess of 3 million ounces.”

Production costs rose to USD763 per ounce company-wide on the output shortfall and cost of developing new resources. Cash costs, meanwhile, rose to USD538 per ounce during the fiscal third quarter, up from USD476 in the prior period. Both figures still build in significant profit at current gold prices. However, these costs should also decline substantially as output returns to normal levels at existing mines and new facilities come on stream.

Meanwhile, Newcrest continues to generate substantial levels of free-cash flow, providing internal funds for mining even as its cost of capital remains low. Debt is negligible, with total equity nearly four times total liabilities. Fiscal second-quarter results, which reflected more normal weather conditions, featured a 66 percent boost in revenue on a 70 percent jump in output, along with a near doubling of profit excluding one-time items.

One note of uncertainty is the resignation of CEO Smith, who has helmed the company since July 2006 and is widely respected as one of the best mining executives in Australia. Smith will hand over the reins in September to Greg Robinson, the current executive director of finance.

That move was somewhat expected, given Smith’s passion as a dealmaker who shaped Newcrest into a first-tier global gold producer. By contrast, Robinson’s chief talent is running operations, a trait that will be essential to consolidating the company’s growth. Robinson is a veteran of Merrill Lynch and BHP Billiton (NYSE: BHP), where he worked in finance roles for the energy and petroleum divisions before joining Newcrest in 2006. Smith will be missed but Robinson may be a better fit for Newcrest’s top slot given the company’s future needs.

Additionally, volatility in gold prices, weather and political developments will weigh on Newcrest’s earnings and stock price. The stock, however, is already priced at a discount to its North American peers because of these well-known issues. Consequently, it’s possible that Newcrest could deliver an upside surprise given the opportunities for expanding production.

The stock has handed US investors a total return of roughly 45 percent over the last 12 months, nearly half of which was provided by the Aussie dollar’s gains against the greenback. Five-year gains are more than 200 percent. However, the company has grown into the higher price and then some, with revenue more than tripling and earnings excluding items rising roughly eight-fold over that time.

Finally, gold mining giant Barrick Gold Corp (NYSE: ABX) surprised some investors with its decision to buy a copper miner like Equinox Minerals (TSX: EQN, OTC: EQXMF) rather than a gold company. We have, however, seen plenty of takeover activity in the gold arena in this cycle. And at its current low valuation, Newcrest remains both potential prey and predator, making a lucrative takeover yet another road to profits for investors.

Buy Newcrest Mining up to AUD45, or USD48 if you buy the American Depositary Receipt, which trades over-the-counter.

Source: Bloomberg