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Analyst Blog

On Nov 12, we reiterated our Neutral recommendation on Newmont Mining Corporation (NEM - Analyst Report). While we are concerned about the weak gold and copper price environment, we are encouraged by the progress of the company's growth projects and its cost management initiatives.

Why Kept?

Newmont’s adjusted earnings for third-quarter 2013 (reported on Oct 31) beat the Zacks Consensus Estimate while sales miss. Weak gold and copper pricing coupled with lower productions from South America and Indonesia contributed to a double-digit drop in revenues. While the company backed its gold production outlook for 2013, it lowered its copper output guidance for the year.

Newmont, a Zacks Rank #3 (Hold) stock, continues to invest in growth projects in a calculated manner. Its remains optimistic about its Long Canyon project in Nevada and expect production between 200,000 and 300,000 ounces a year from the site in the first five years.

Newmont has also made a significant progress with respect to the Akyem project in Ghana and recently announced the commencement of commercial production. The company has also commenced commercial production from its Phoenix copper leach project in Nevada. Newmont’s production performance is expected to improve on the back of higher mill throughput in Nevada and new production at Akyem.

Newmont is also making notable progress with its cost and efficiency improvement programs. The company has reduced capital expenditure by $400 million since the beginning of 2013. All-in sustaining cost fell 16% year over year in the third quarter. Successful cost reductions enabled Newmont to generate positive free cash flows in the third quarter and are helping it to mitigate the unfavorable impact of lower commodity prices.

However, the recent downturn in gold prices represents a concern. Gold prices fell sharply recently to hit a one-month low level on potential for a Fed stimulus tapering by the end of 2013. Newmont’s third-quarter sales were hurt by a 20% and 13% decline in gold and copper prices, respectively.

In addition, lower ore grades are affecting production across a number of operations. Newmont’s production remains challenged at the Batu Hijau mine in Indonesia as certain geo-technical issues are still impacting weight stripping capability. Gold production from the mine tumbled 44% year over year in the third quarter.

Other Stocks to Consider

Other companies in the mining industry with a favorable Zacks Rank include Franco-Nevada Corp. (FNV - Snapshot Report), Pretium Resources Inc. (PVG - Snapshot Report) and Silvercrest Mines Inc. (SVLC - Snapshot Report). While Franco-Nevada and Pretium Resources carry a Zacks Rank #1 (Strong Buy), Silvercrest Mines retains a Zacks Rank #2 (Buy).

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