Newmont Worth $60 Despite Production Concerns

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Newmont Mining

Newmont Mining (NYSE:NEM) reported its first quarter earnings last week, and while output was down across its mines that was offset by higher realized gold prices. The company is well-positioned to take advantage of expected sustained high gold prices in the near-term, as are competitors such as Barrick Gold (NYSE:ABX) and Goldcorp Inc. (NYSE:GG), but some production uncertainty could limit its ability to do so.

In the wake of recent developments and our new gold price outlook, we have revised our price estimate for Newmont’s stock to $60, implying a nearly 25% premium to the market price.

See our complete analysis for Newmont here.

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Higher Prices, Lower Output

The company’s first quarter revenues and net income from continued operations both jumped by 9% to $2.68 billion and $561 million, respectively, on a year-over-year basis. [1] In line with our expectations, gold production for the first quarter was 1.3 million ounces, down 3% from the same period last year, while the average gold price rose by about 22% in the quarter. Copper production declined by 35% to 35 million pounds while copper prices remained unchanged. The decline in production was primarily due to the mining of lower grade ore in its existing mines.

Gold Outlook Still Solid…

Gold is currently trading comfortably over the $1,600 mark. With the Federal Reserve’s intention to keep interest at near-zero levels and a possibility of further quantitative easing, we foresee a further run-up in gold prices this year. Newmont’s CEO expects that the company’s average realized gold price for 2012 will be $1,750 per ounce, with a high of $2,000 per ounce. Rising gold prices provide a double benefit to investors as the company has directly linked its dividend to gold prices.

Copper could also witness a bull run as demand from China is likely to increase thanks to growing demand from the renewable energy sector and several other industries.

… But Production Woes Still a Concern

Lower ore grades will likely continue to hurt Newmont’s production numbers with annual production pegged at 5.2 million ounces of gold and 170 million pounds of copper for 2012. There is no immediate respite for the company’s production woes even as it has plenty of new projects lined up for development. Major projects including Conga in Peru and Akyem in Ghana will commence operations by the end of 2014.

Uncertainty Looming Over the Conga Project

The Conga project will remain suspended until the company assesses the impact of the Peruvian government’s requested changes. The project was set to commence production by 2014, producing close to 400,000 ounces of gold and up to 150 million pounds of copper annually. Another important project for the company is the development of the Hope Bay region in Canada, which has around 9 million ounces of potential reserves and is the largest known undeveloped gold project in the world. We estimate the company’s gold production will reach close to 7 million ounces by 2015.

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Notes:
  1. Newmont Announces First Quarter Net Income from Continuing Operations Up 9% to $1.13 per Share, Company Press Release, April 2012 []