Metals Prices Are Rising, But Is Newmont Mining a Golden Opportunity?

Gold, Money

Newmont Mining Corporation (NYSE:NEM), is one of the world’s largest gold mining companies. It acquires, explores for, and produces not only gold, but also copper and silver deposits. The company’s assets and operations are located in the United States, Australia, Peru, Indonesia, Ghana, New Zealand, Mexico, and Suriname. As of December 31, 2013, it had proven probable gold reserves of approximately 88.4 million ounces and an aggregate land position of approximately 24,000 square miles. It was long one of my favorite plays in the gold mining space for its capital appreciation and its high dividend.

As the price of gold and silver has plummeted in the last two years, so has Newmont’s share price and dividend yield. However, with gold now back over $1300 an ounce, it seems like the stock is setting up to breakout, having risen 10 percent this week. To understand if the stock is a buy going forward, an analysis of its recent performance is necessary.

First, the company managed to achieve reported net income attributable to shareholders from continuing operations of $117 million, or $0.23 per basic share, and adjusted net incomeof $108 million, or $0.22 per basic share. Further, they Generated revenue of $1.8 billion compared with $2.2 billion in 2013 (due to depressed gold prices.) They also generated cash from continuing operations of $183 million. What the company has strived for is cutting costs. The company managed to generate cost savings of $82 million in gold all-in sustaining costs, which equates to $1,034 per ounce, down 8 percent from the prior year quarter. Realized costs applicable to sales were $751 per ounce of gold and $2.71 per pound of copper, a decrease of 1 percent and an increase of 19 percent, respectively, over first-quarter last year.

 

Operationally, the company delivered 1.2 million ounces and 24 thousand tons of attributable gold and copper production, with higher gold production coming from its Australia/New Zealand and Africa operations. Improved production and stable operating costs relative to the prior year quarter were offset by declines in average realized gold and copper prices of approximately 21 percent and 20 percent, respectively. Reduced spending on exploration, advanced projects, and sustaining capital also led to $82 million in lower gold all in sustaining costs.

What hurt, though, was an average realized gold and copper price of $1,293 per ounce and $2.50 per pound, respectively, compared with $1,631 per ounce and $3.12 per pound, respectively, last year. Gary Goldberg, President and Chief Executive Officer, stated:

We are building on the momentum we established in 2013 with strong cost and production performance in the first quarter of 2014. Our team drove down all-in sustaining costs by $82 million compared to the prior year quarter through sustainable cost and efficiency improvements. We are also delivering on our commitment to improve mining fundamentals, which led to a 40 percent increase in gold production at Tanami compared to the prior year quarter. We are confident we can maintain this trajectory as the year progresses, as evidenced by our updated outlook for lower costs and higher production for Africa.

Looking ahead, gold, silver, and copper prices are all on the mend. Guidance was also quite strong and I am pleased with the outlook. The company continues to expect total attributable gold production of between 4.6 to 4.9 million ounces at costs applicable to sales of $740 to $790 per ounce and all in sustaining costs of $1,075 to $1,175 per ounce. The company also continues to expect total copper production of between 95 to 110 thousand tons at costs applicable to sales of $2.00 to $2.25 per pound and all in sustaining costs of $2.75 to $2.95 per pound.

As a result of mine plan optimization at the Ahafo operation in Africa, the company is increasing production outlook from between 785,000 to 850,000 ounces to between 790,000 to 870,000 ounces for the region. Both Ahafo and Akyem are realizing lower costs and the company is reducing its Africa regional costs applicable to sales from $575 to $625 per ounce to $510 to $555 per ounce, and all in sustaining costs from $795 to $865 per ounce to $690 to $755 per ounce for 2014. This cost reduction, coupled with increased production, is a very strong sign and thus I am quite pleased. Metals prices are on the rise and the stock is looking to technically break out. I am upgrading my outlook from a hold to a buy and assigning a $31 price target.

Disclosure: Christopher F. Davis hold no position in Newmont Mining and has no plans to initiate a position in the next 72 hours. He has a buy rating on the stock and a $31.00 price target.

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