Saturday, November 17, 2012

Newmont Mining Corporation (NEM) Q3 Results

     Newmont Mining Corporation (NEM) reported earnings below analyst consensus and UASBIG estimates. The company reported revenues of $2.5bn and adjusted EPS of $0.86 per share, down 10% and 33% year-over-year. NEM missed analyst EPS estimates by $0.03 on lowered production volumes and increased costs and guided to the higher end of their cost guidance.
     Newmont Mining reported revenues of $2.5bn based on consolidated gold and copper sales volumes of 1,370kOz and 58Mlb respectively. NEM realized average gold and copper prices of $1659/Oz and $3.55/lb, up 2% and 24% respectively. Metal sales volumes fell 6% and 37% based on lower production throughout the quarter. Despite out performance from the core operations in the Americas, overall gold production attributable to the quarter fell 5% to 1,200kOz. Mines in the Asia-Pacific region, specifically Batu Hijau and Tanami in Australia and Ahafo in Ghana, lead to the underperformance in production. Performance in the Americas was strong with Nevada operations increasing production by 7% with the initialization of the new Emigrant mine, which is expected to add 80-90kOz of gold going forward. Additionally, the Yanacocha mine in Peru had a particularly strong quarter, with gold production increasing 8% and costs decreasing 15%.
     Despite increased production at Boddington, costs increased 25% on higher maintenance costs associated with unexpected equipment failure. Tanami production volumes decreased due to backfill shortcomings which limited access to expected high-grade ores. Lastly, production at Batu Hijau decreased by 89% due to low-grade ores caused by a wall failure in April. Overall, the strong performance out of the Americas and poor performance out of the Asia-Pacific region resulted in average costs of $693 per kOz of gold produced, up 11% year-over-year, which eroded gross margins.
     Going forward, we are expecting a strong fourth quarter for NEM as the company resolves mine issues and sells accumulated inventories. Resolved issues at Boddington should increase production and decrease costs attributable to sales, although Tanami and Batu will take longer to overcome. Production in the Americas will be bolstered by continued development of the Emigrant mine, although the outperformance in Yanacocha is expected to undergo some mean reversion. The Akyem mine in Africa continues to go smoothly and its completion in 2013 will serve as a positive catalyst going forward. Lastly, with the reelection of President Barack Obama, and the continuation of Federal Reserve Chairman Ben Bernanke, the macro environment remains conducive to gold appreciation. Bernanke, who would not have been reappointed under Mitt Romney, remains committed to loose monetary policy until 2015, which should bolster gold prices going forward. In addition to higher realized revenues and thus higher EPS, increases in the gold prices will create shareholder value through NEM's gold spot-linked dividend. NEM has already declared a Q4 dividend of $0.35 (3% annual yield) based on average spot prices in the $1600's, and this is expected to increase to $0.43 (3.7% annual yield) based on Q3 average spot prices in the $1700's. Going forward, if gold spot rises $85 or 5.0%, the dividend will jump to an annual yield of about 4.5%. Considering our expectation of strong fourth quarter production, favorable mine developments in Ghana, increased dividends, and favorable economics for gold appreciation, we maintain our BUY rating on Newmont Mining Corporation.

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