Earnings Scorecard: Newmont Mining (NEM)

Newmont Mining Corporation (NEM) reported its earnings for the second quarter of 2010 on July 28, 2010, missing the Zacks Consensus Estimate by 10 cents per share. Analysts have a mixed opinion on the stock given the company’s impressive year over year results, yet missing estimates.

Second Quarter Review

Mining giant Newmont Mining Corporation’s second quarter earnings (excluding extraordinary charges) of $377 million or 77 cents per share fell short of the Zacks Consensus Estimate of 87 cents. However, earnings jumped 79% from $211 million or 43 cents in the year-ago period. Including one-time charges, the company earned $382 million or 78 cents per share.

Robust earnings were helped by higher gold prices, which reached a two-month high in June this year. Newmont realized gold prices of $1,200 per ounce, while copper prices were $2.33 per pound.

Although quarterly revenues climbed 34% year over year to $2.1 billion on higher gold and copper prices, it missed the Zacks Consensus Estimate of $2.2 billion. Gold production increased 10% to 1.3 million ounces at of $492 per ounce. Operating costs increased 16% year over year in the second quarter of 2010 based on higher costs in Nevada, at Yanacocha in Peru and at Batu Hijau in Indonesia, as well as incurring higher cost for production from the Boddington mine.

Detailed discussion of the earnings release can be found at: Newmont Falls Short of Zacks Ests

Agreement of Analysts

Newmont has performed well on a year over year basis albeit missing estimates. Analysts and investors have mixed sentiments on the company, as reflected in the estimates revision. For the immediate quarter, 5 of 14 analysts covering the stock raised expectations while only 4 moved in the opposite direction in the last 30 days. For full year 2010, 4 of 15 analysts increased their estimates while 7 moved in the opposite direction. Analysts are confident of Newmont benefiting from rising gold prices; however, they remain concerned about increasing costs, which are hurting margins.

Magnitude of Estimate Revisions

For the third quarter of 2010, the Zacks Consensus Estimate inched up 3 cents to 93 cents over the last 30 days while it increased by another 3 cents in the last 7 days. For full year 2010, it shot up by 12 cents to $3.66 per share over the last month but declined 4 cents in the last week.

With respect to earnings surprises, Newmont has a positive track record in 3 of the preceding four quarters as reflected by the average earnings surprise of 20.59%. Currently, the Zacks Consensus Estimate is pegged at 95 cents and $3.63 per share for the upcoming quarter and full year 2010 with an upside potential of 5.26% and 0.55%, respectively.

Our Recommendation

Denver, Colorado-based Newmont Mining is one of the world’s largest un-hedged gold producers. Gold prices are high, as a result of strong demand, U.S. trade/budget/currency issues and global instability. We expect Newmont’s gold sales to rise backed by the start of the recently acquired Boddington mine in Australia.

However, declining ore grades are reducing gold production and raising mining costs, particularly at the Yanacocha mine in Peru and Batu Hijau mines in Indonesia. This is prompting Newmont to reduce capital expenditure. Earnings in the second quarter of 2010 fell short of the Zacks Consensus Estimate, following which shares slipped 5%.

Newmont reiterated its guidance for the full year 2010. The company anticipates gold production of 5.3–5.5 million ounces in 2010, but at a higher cost of $460 to $480 per ounce. Newmont expects gold prices to moderate to $1,100 per ounce and copper prices are expected at $3 per pound. At Boddington, Newmont continues to expect lower ore grades to pull down production to 750,000–825,000 ounces of gold, from the present 800,000–875,000 ounces.

However, the company expects costs to decline with higher ore grades at Batu Hijau. Newmont maintains its 2010 capital expenditure outlook of $1.4 to $1.6 billion. About 30% is likely to be invested in each of the North America and Asia-Pacific regions, and the remaining 40% at other locations. Such expenditures are related to the ramp up activities at the Akyem project in Ghana, the Conga project in Peru, Hope Bay in Canada and the Nevada project.

Currently, Newmont is a short-term (1 to 3 months) Zacks #3 Rank (“Hold”) and a long-term (6 months and higher) Neutral recommendation.

NEWMONT MINING (NEM): Free Stock Analysis Report

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