Newmont Misses, Cuts Output Target

Zacks

Mining giant Newmont Mining Corporation’s (NEM) second quarter-2012 adjusted earnings of 59 cents a share came in significantly behind last year’s earnings of 90 cents, and missed the Zacks Consensus Estimate of 94 cents by a huge margin.

Reported profit plunged a staggering 47% to $279 million, or 56 cents per share, in the quarter, from $523 million (or $1.06 per share) in the prior-year quarter.

Revenues went down 6% year over year to $2.2 billion and trailed the Zacks Consensus Estimate of $2.4 billion. The company’s below par performance in the second quarter did not go down well with the investors and the stock lost almost 4% in extended trading.

Newmont’s attributable gold and copper production declined 3% and 10%, respectively, from last year to 1.18 million ounces and 38 million pounds. On a year-over-year basis, attributable gold and copper sales also dropped 6% and 35%, respectively, to 1.14 million ounces and 29 million pounds.

Moreover, cost applicable to sales (CAS) went up 17% from last year to $681 per ounce of gold, whereas average realized price of gold improved only 6% to $1,598 per ounce. In addition, copper costs shot up 75% year over year and this was further compounded by a 25% fall in average realized price of copper.

The company, which is the only gold equity in the S&P 500, has had a challenging year so far. The stock is down roughly 23% this year as against an 8.14% gain recorded by the S&P 500. It has struggled with various bottlenecks at its mines, such as protests in Peru and declining grades.

Regional Performance

North America: Gold production at Newmont’s Nevada and La Herradura mines increased 6% and 11%, respectively, due to higher mill throughput and higher leach placement. However, lower grade at Midas and Phoenix in Nevada partially offset growth.

CAS per ounce jumped 13% at Nevada as a result of higher underground mining costs, higher royalties and lower by-product credits. Also, La Herradura saw CAS per ounce increase 11% year over year due to higher waste tons mined, higher diesel and higher employee profit sharing costs. Newmont has lowered the gold production outlook for both the mines this year.

South America: Gold production at Yanacocha in Peru increased 14% from last year driven by higher mill grade and recovery, but partially offset by lower leach placement. CAS per ounce declined 14% year over year as a result of the production jump and lower mining costs. However, higher workers' participation costs and lower by-product credits kept costs from declining further.

Newmont has lowered its 2012 production outlook in South America as well. The company expects to produce 675,000 to 700,000 ounces at Yanacocha as against the earlier expectation of 690,000 to 750,000 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. Boddington produced 180,000 ounces of gold and 18 million pounds of copper. Gold production was down 10% from last year due to lower mill grade and recovery but CAS per ounce jumped 48%, driven by lower gold production and higher milling costs.

At Batu Hijau, both gold and copper production fell 68% and 25% to 8,000 ounces and 20 million pounds, respectively. CAS per ounce of gold and per pound of copper bounced 92% and 79%, respectively. At Others in Australia/New Zealand, gold production dropped 15% year over year to 207,000 ounces while CAS per ounce jumped 38%.

The mines suffered from lower grades, higher costsand a stronger Australian dollar. Newmont has cut the production forecast for all three mines in the Asia-Pacific.

Africa: Attributable gold production at the company’s Ahafo mine in Ghana dropped 10% from last year to 132,000 ounces as a result of lower mill throughput and grade. In addition, CAS per ounce jumped 31% year over year, driven by lower production and higher labor, diesel and mine maintenance costs. Like other mines, Newmont lowered its production forecast in this region as well.

Financial Position

Newmont had cash and cash equivalents of $1.9 billion as of June 30, 2012, slightly higher than the $1.85 billion it had as of June 30, 2011. However, the company’s long-term debt increased significantly to $6.1 billion as of June 30, 2012 from $3.8 billion as of June 30, 2011.

Consolidated capital expenditure in the second quarter came in at $882 million, up from $618 million last year. Newmont has lowered its capital expenditure forecast for 2012 on the account of delays in developing the Conga project in Peru. It now expects to incur attributable capital expenditure in the range of $2.7 to $3 billion this year, down from the earlier projection of $3 to $3.3 billion.

Dividend

Newmont's Board approved third-quarter 2012 gold price-linked dividend of 35 cents per share. The dividend is based on the average London P.M. Fix of $1,609 per ounce for the second quarter of 2012, an increase of 17% over the dividend paid in the second quarter of 2011.

Outlook

Newmont has cut its attributable gold and copper production forecasts for the year. Gold production is expected to be between 5 to 5.1 million ounces, as against 5 to 5.2 million ounces expected earlier. The drop in production outlook is a result of lower tons mined at Tanami.

However, Newmont maintained the forecast for the costs applicable to sales. Costs applicable to sales on a co-product basis are expected to be between $625 and $675 per ounce for gold.  Costs applicable to copper sales on a co-product basis are expected to be between $1.80 and $2.20 per pound of copper.

Recommendation

Based in Colorado, Newmont is one of the world's largest producers of gold with several active mines in Nevada, Peru, Australia/New Zealand, Indonesia and Ghana. It competes with the likes of AngloGold Ashanti Ltd. (AU), Barrick Gold Corporation (ABX) and Gold Fields Ltd. (GFI).

Newmont is well-positioned to gain from the rising price of gold. But the company’s direct mining costs are increasing due to declining grades, increased royalties and other costs.

We currently have a long-term (more than 6 months) Neutral recommendation on Newmont. The stock retains a Zacks #3 Rank, indicating a short-term (1 to 3 months) Hold rating.

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