We are upgrading our recommendation on Newmont Mining Corporation (NEM) to Neutral. The company is expected to benefit from higher gold prices, leading to increased returns for its shareholders.
Newmont’s third-quarter 2012 adjusted earnings of 85 cents a share missed the Zacks Consensus Estimate of 90 cents. Profit (attributable to Newmont shareholders), as reported, slipped roughly 26% year over year to $367 million, hurt by the twin impact of lower sales and higher costs.
Revenues fell 10% year over year to $2,480 million, missing the Zacks Consensus Estimate of $2,528 million. Lower production at the Colorado-based company’s Batu Hijau mine in Indonesia dragged down sales in the quarter.
The company now expects attributable gold production for 2012 to be at the lower end of its guidance of approximately 5 million to 5.1 million ounces. Costs applicable to sales are expected to be at the higher end of its forecast of between $650 and $675 per ounce of gold.
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) and Barrick Gold Corporation (ABX).
Newmont is an un-hedged gold producer and, as such, it is well positioned to gain from the rising gold prices. Gold prices recently rose to a three-week high level. Demand for the yellow metal is rising as investors are increasingly concerned about the looming U.S. fiscal cliff, which will result in sharp tax hikes and spending cuts.
The company’s unique gold price-linked dividend policy represents another bright aspect. Newmont’s current dividend yield (of roughly 3%) is the highest among its peers, backed by its strong liquidity position.
Moreover, Newmont continues to invest in growth projects in a calculated manner. Its remains optimistic about its Long Canyon project in Nevada and currently expect production between 200,000 and 300,000 ounces a year from the site in the first five years. The company has also made a significant progress with respect to the Akyem project in Ghana with production expected to commence in late 2013.
However, Newmont may continue to face headwinds due to increasing mining and non-mining costs. In the third quarter, cost applicable to sales went up 11% from last year to $693 per ounce of gold, partly due to declining gold grades.
Moreover, lower ore grades are affecting production in the company’s Asia Pacific operation. Its production remains challenged at the Tanami mine in Australia and Batu Hijau mine in Indonesia.
Our recommendation on the stock is in tandem with a short-term Zacks #3 Rank (Hold).
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