We maintain our Neutral recommendation on Newmont Mining Corp. (NEM), the world's largest producers of gold with several active mines in Nevada, Peru, Australia/New Zealand, Indonesia and Ghana.
Newmont Mining reported excellent third-quarter 2011 results with adjusted net income of $1.29 per share compared with last year’s $1.08, ahead of the Zacks Consensus Estimate at $1.24. Total revenue was $2.7 billion, up 6% year over year.
Newmont reported attributable gold and copper production of 1.3 million ounces and 58 million pounds, respectively, in the quarter at costs applicable to sales (CAS) of $622 per ounce, and $1.10 per pound on a co-product basis.
Newmont continues to focus on delivering growth, generating profits and returning capital to shareholders. For 2011, the company expects to spend $2.1 billion to $2.5 billion in attributable capital expenditures, or $2.7 billion to $3.0 billion on a consolidated basis.
Approximately 40% of 2011 consolidated capital expenditures are expected to be related to major project initiatives. The remaining 60% is for growth and sustaining capital. Further, Newmont also closed its Frontier Gold acquisition.
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 for the first 5 years of operation.
The company is also pursuing a number of projects, 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, which are currently expected to add up to 6 years to the mine life of gold quarries.
Congo’s potential is estimated to be 15 million to 20 million gold ounces and 4 million to 6 million pounds of copper, and is one of the most compelling projects of the company. The Akyem project is expected to double its current annual production in Africa and has a potential for 8 million to 9 million ounces of gold. The current potential at Hope Bay is expected to be 9 million ounces of gold.
Demand for gold is improving. Investment is rising due to escalating demand for gold exchange-traded funds or ETFs. Demand for gold is expected to remain high due to global instability and U.S. trade/budget deficits.
Being an entirely un-hedged gold producer, Newmont reaps immediate benefits from these trends. In 2010, gold production was 6.5 million, same as in 2009. Of the 2010 consolidated gold production, approximately 30% came from North America, 23% from South America, 39% from Asia Pacific and 8% from Africa.
However, Newmont’s direct mining costs are increasing due to declining grades, increased royalties, equipment maintenance, waste removal, pit dewatering, and labor and fuel costs. The company’s non-mining costs are also increasing due to legal expenses for environmental degradation lawsuits and government claims.
Moreover, due to increases in gold prices and a higher Australian dollar rate, the company lifted its cash cost guidance range to $485– $500 per ounce of gold from the initial forecast of $460 to $480 per ounce. The company also narrowed its production guidance to 5.3–5.4 million ounces from 5.3-5.5 million ounces.
In the gold industry, gold grades have decreased by approximately 27% since 2003. As operations mature, gold producers, including Newmont, are forced to extract ores with lower grades that are often accompanied by higher separation and extraction costs. Lower-than-expected ore grades are affecting gold production at the Boddington mine.
For fiscal 2011, the company reiterated its previous expectation of attributable gold production of approximately 5.1 million to 5.3 million ounces, with attributable copper production of 190 to 220 million pounds. Costs applicable to sales are expected to be between $560 and $590 per ounce for gold. Costs applicable to sales are expected to be between $1.25 and $1.50 per pound of copper.
The company faces stiff competition from Posco (PKX) and Arcelor Mittal (MT).
Newmont has a short-term (1 to 3 months) Zacks #3 Rank (Hold) and a long-term Neutral recommendation.
ARCELOR MITTAL (MT): Free Stock Analysis Report
NEWMONT MINING (NEM): Free Stock Analysis Report
POSCO-ADR (PKX): Free Stock Analysis Report
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