Newmont Mining (NYSE:NEM) will release its second quarter earnings July 25. We expect the company to report increase in revenue mainly on back on higher realized prices of gold. Margins may improve mainly due to the appreciating U.S. Dollar. Lower gold and copper volumes and increased input costs could however put a damper on our expectations. Newmont is the world’s second largest gold miner with operations in the Asia Pacific, North America, South America and Africa.
We currently have a $59 price estimate for Newmont’s stock, implying a nearly 30% premium to the market price.
Global economic instability has kept gold demand intact as investors look for safe investment options. We see higher realized prices for gold compared to a year ago quarter. However, a slight decline in gold production could dampen the growth to some extent.
We expect the company’s copper business to disappoint as copper prices have crashed in the last few months in the wake of Euro zone crisis and Chinese demand concerns. Copper sales volumes are also expected to fall due to lower ore grades and mill throughput in Batu Hijau mines in Indonesia.
The appreciating U.S. Dollar against other currencies could result in margin improvement even as rising cash costs will keep the margins in check. While the company realizes most of its sales in USD, its costs are based on the local currency of the countries it operates in. Hence an appreciating USD provides for lower costs when translated into USD equivalent.
Near Term Production Woes a Concern, Long Term Outlook Solid
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 though it has plenty of new projects lined up for development. The Conga project has been delayed following protests and is expected to start production in 2016-2017. Other major project Akyem in Ghana will commence operations by the end of 2014.
We believe that Newmont’s planned projects and resource base make it fundamentally strong given the strong demand for gold from emerging markets. Of late, gold has lost its luster, but we expect it to continue its bull run due to high inflationary expectations in the U.S. as well as Euro zone concerns. Rising gold prices provide double benefits to investors as the company has directly linked its dividend to gold prices.
After a near-term slowdown, we expect copper consumption in China to pick up thanks to growing demand from renewable energy sector and other industries. However, upcoming supply will keep the copper prices in check. Our concerns are raised from the rising input costs and growing political risks globally.