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Newmont Shy by a Nickel, Net Sags

NEM ABX AU

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Gold mining giant Newmont Mining Corporation’s (NEM - Analyst Report) third-quarter 2012 adjusted earnings of 85 cents a share came in well behind last year’s earnings of $1.26 and trailed the Zacks Consensus Estimate of 90 cents. The adjusted earnings exclude one-time items including restructuring expenses.

Profit (attributable to Newmont shareholders), as reported, tumbled roughly 26% year over year to $367 million or 74 cents per share from $493 million (or 98 cents per share) in the prior-year quarter. Profit from continuing operation slipped 19% year over year to $400 million or 81 cents a share. The bottom line was hurt by the twin impact of lower sales and higher costs.

Newmont, which is the only gold equity in the S&P 500, has been struggling with increasing mining and non-mining costs. The Colorado-based company incurred $48 million in restructuring and other costs in the third quarter.  

Newmont’s revenues fell nearly 10% year over year to $2,480 million, missing the Zacks Consensus Estimate of $2,528 million. Sales were hit by a significant decline in production at the company’s Batu Hijau mine in Indonesia.  

The company’s attributable gold and copper production fell 5% and 38% year over year, respectively, to 1.2 million ounces and 35 million pounds. Attributable gold and copper sales also dropped 4% and 27% from the prior-year quarter, respectively, to 1.2 million ounces and 37 million pounds. Production was hurt by lower mill availability and recoveries at Boddington and lower ore tons and grade mined at Tanami in Australia.

Cost applicable to sales (CAS) jumped 11% year over year to $693 per ounce of gold, whereas average realized price of gold fell 2% to $1,659 per ounce. Copper costs propelled 116% year over year to $2.38 a pound while average realized price of copper climbed 21% to $3.55 per pound.

Newmont’s shares, which are down roughly 14% so far this year, fell 1.9% in extended trading yesterday.

Regional Performance

North America

Gold production at the Nevada mine rose 7% year over year due to higher mill grade and leach placement. However, lower grade at Phoenix partly offset the growth. Production at La Herradura declined 6% as higher leach placement was more than offset by smelter adjustments. Newmont narrowed the gold production outlook for the Nevada mine while retaining its production target for La Herradura.

South America

Gold production at Yanacocha in Peru rose 8% year over year from the last year driven by higher mill recovery, partly offset by lower leach placement. Newmont has narrowed its 2012 production outlook for Yanacocha and now expects to produce 680,000 to 690,000 ounces as against the earlier expectation of 675,000 to 700,000 ounces.

Asia Pacific

Newmont operates three mines in the Asia-Pacific, namely, Boddington in Australia, Batu Hijau in Indonesia and Others in Australia/New Zealand. Gold and copper production from Boddington rose 1% and 7% year over year, respectively, due to higher mill grade.

At Batu Hijau, both gold and copper production plunged 89% and 54%, respectively, to 7,000 ounces and 19 million pounds due to lower ore grade. At Others in Australia/New Zealand, gold production dropped 14%, partly due to lower underground mining rates at Tanami. Newmont cut the gold production forecast for both Boddington and Others operations while keeping its target for Batu Hijau.

Africa

Attributable gold production at the company’s Ahafo mine in Ghana dropped 10% from the last year as a result of lower ore grade, in part, masked by higher mill throughput. Like other mines, Newmont kept its production forecast for Ahafo.

Financial Position

Newmont had cash and cash equivalents of $1.5 billion as of September 30, 2012, down 27% year over year. The company’s long-term debt increased roughly 45% year over year to $6.1 billion.

Dividend

Newmont's Board has approved gold price-linked dividend of 35 cents per share for the fourth quarter. The dividend is based on the average London P.M. Fix for the previous quarter.

Outlook and Recommendation

Newmont noted that its attributable gold and copper production is now expected to be at the bottom end of its earlier released production targets of 5 million to 5.1 million ounces and 145 million to 165 million pounds, respectively.
 
Moreover, Newmont expects its CAS (on a co-product basis) for gold to be at the top end of its forecast of between $650 and $675 per ounce. The company raised its CAS target for copper to between $2.20 and $2.35 per pound from the earlier view of $1.80 and $2.20 per pound factoring in the increased cost production across Boddington and Batu Hijau.

The company continues to expect attributable capital expenditure in the range of $2.7 billion to $3 billion this year. Capital spending for the third quarter was $811 million.

Newmont is one of the world's largest producers of gold with several active mines in Nevada, Peru, Australia/New Zealand, Indonesia and Ghana. The company continues to invest in growth projects in a calculated manner and is ramping up production capacity. But rising costs and delays in project developments are significant headwinds that may reduce the company’s earnings power.

Newmont, which competes with the likes of AngloGold Ashanti Ltd. (AU - Snapshot Report) and Barrick Gold Corporation (ABX - Analyst Report), retains a short-term Zacks #3 Rank (Hold). We currently have a long-term (more than 6 months) Underperform recommendation on the stock.

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