Earnings Preview: Newmont Mining (NEM)

Newmont Mining Corp. (NEM) is slated to release its fourth-quarter 2010 results on Thursday, February 24 before the market opens. The current Zacks Consensus Estimate for the fourth quarter is $1.14 per share, representing an annualized growth of 0.13%.

With respect to earnings surprise, over the trailing four quarters, Newmont has outperformed the Zacks Consensus Estimate in three out of the four quarters. The average earnings surprise was a positive 13.84%, signifying that the company has outdone the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Strong Preliminary 2010 Results

On January 20, 2011, Newmont reported its preliminary fourth quarter and 2010 production results. For the year 2010, gold production rose slightly to 5.4 million ounces over the previous year while copper production jumped 45% year over year to 327 million pounds. It sold 5.3 million ounces of gold at an average realized price of $1,222 each and 292 million pounds of copper at an average realized price of $3.43 each. Operating gold margin hiked 30.2% to $737 per ounce in 2010, highlighting its increasingly attractive gold price leverage in a rising metal price environment.

Newmont produced 1.4 million ounces and 74 million pounds of gold and copper, respectively, in the fourth quarter of 2010. Quarterly sales of gold were 1.3 million ounces and that of copper were 57 million pounds at average realized gold and copper prices of $1,368 per ounce and $4.52 per pound, respectively.

The company spent about 25% of its capital expenditure for the year 2010 on its pipeline projects at Akyem, Congo and Hope Bay. Capital expenditure for the year was $1.4 billion.

Third-Quarter Performance

On November 2, 2010, Newmont reported its third quarter fiscal 2010 results. Excluding extraordinary charges, earnings were $534 million or $1.08 per share, exceeding the Zacks Consensus Estimate of $0.95 and the prior-year earnings of $387 million or $0.79 per share.

Including one-time charges, the company earned $537 million or $1.09 per share, an increase of 38% from the year-ago quarter of $388 million or $0.79 per share. Robust earnings were helped by higher gold prices. Newmont realized gold prices were $1,221 per ounce while copper prices were $3.67 per pound.

Quarterly revenues climbed 30% year over year to $2.6 billion on higher gold and copper prices, surpassing the Zacks Consensus Estimate of $2.5 billion. Gold production increased 7.7% to 1.4 million ounces at a cost of $477 per ounce. Costs applicable to sales increased 18% year over year in the reported quarter based on higher waste mining and royalty costs, strong Australian dollar coupled with higher-cost production from the Boddington mine and lower production in South America, partially offset by higher production in Africa.

Agreement of Estimate Revisions

In the last 30 days, out of the 14 analysts covering the stock, 1 analyst increased its EPS estimates, while 2 analysts decreased their EPS estimates, for the fourth quarter of fiscal 2010.

In the last 30 days, out of the 16 analysts covering the stock, 1 analyst increased its EPS estimates, while 2 analysts decreased their EPS estimates for fiscal 2010. For fiscal 2011, out of the 17 analysts covering the stock, 2 analysts increased their EPS estimates and 2 analysts decreased their EPS estimates.

Magnitude of Estimate Revisions

Despite the mixed trend, earnings estimates for the fourth quarter, in the last 30 days, remained flat at $1.14 per share. Similarly, for fiscal year 2010 and 2011, the earnings estimate revision remained flat at $3.82 and $5.11 per share, respectively.

Newmont continues to invest in growth projects. The company is ramping up production capacity at the Boddington project in Australia and expects average annual gold sales of about 1 million ounces in its first 5 years of operation. Newmont also has considerable free cash flow reserves as a result of its focus on production and cost cutting initiatives. By the end of September 30, 2010, the company had cash and cash equivalents of $4 billion, which is utilized to fund the projects in pipeline and also to develop core products that are internally developed by the company. Newmont will utilize around 40% of its capital expenditures in the development of its pipeline, funded primarily from net cash from continuing operations, as it continues to deliver solid leverage to the gold price. Newmont also increased its dividend by 50% in the third quarter of 2010, reflecting that the company has enough free cash reserves to return capital to its shareholders.

Our Take

Newmont delivers greater cash flow leverage than any gold company in the world. It also increased its dividend by 50%, displaying its capability to repay shareholders. The company also has some promising projects in its pipeline, such as the Congo project in Peru, Akyem project in Ghana, Hope Bay in Canada and the Gold Quarry West Wall layback project in Nevada. Although the company faces some challenges at the Boddingtan mine, it remains positive and expects production to ramp up in the coming year.

It competes with the likes of AngloGold Ashanti Ltd. (AU), Barrick Gold Corporation (ABX) and Gold Fields Ltd. (GFI).

We maintain our long-term Outperform recommendation for Newmont. Currently, it holds a short-term Zacks # 3 Rank (Hold) on the stock.

NEWMONT MINING (NEM): Free Stock Analysis Report

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