Newmont Mining (NYSE:NEM) reported its second quarter earnings which missed analyst estimates due to higher costs and a higher than projected decline in production. Revenues declined by 6% year-over-year to $2.2 billion. Net profit dropped by 47% to $279 million from $523 million year-over-year. This was due in large part to a $200 million quarter-on-quarter reduction in pretax income at Batu Hijau in Indonesia. While Cost Applicable to Sales (CAS) figures went up for both gold and copper, price of gold didn’t rise enough to completely offset the increased cost for gold and even declined substantially in case of copper, thus resulting in a double whammy. ((Newmont Announces Second Quarter Net Income from Continuing Operations of $0.56 per Share, Company Press Release, July 2012)) Newmont competes primarily with Barrick Gold (NYSE:ABX) and Goldcorp Inc. (NYSE:GG)
Higher Costs, Lower Output
On a year-over-year basis, Newmont’s attributable gold and copper production declined 3% and 10% respectively, to 1.18 million ounces and 38 million pounds. Attributable gold sales declined to 1.14 million ounces, a year-over-year decline of 6%; attributable copper sales declined to 29 million pounds, a year-over-year decline of 35%. The attributable gold production outlook for 2012 was revised to 5.0- 5.1 million ounces from an earlier figure of 5.0-5.2 million. The company termed the decline in production as expected and attributed it to annual planned mill maintenance in Nevada, 3lower tons mined at Tanami in Australia and lower gold and copper production from Batu Hijau mines in Indonesia. Newmont attributed the lowered production guidance to shortfalls at Tanami and Waihi which it said won’t be made up for in 2012.
CAS went up by 17% to $681 per ounce for gold and by 75% to $2.35 per pound for copper. Higher CAS for gold was due to higher-than-budgeted costs in Boddington, Ahafo, Tanami and Waihi, offset by a strong quarter at Yanacocha, Jundee and KCGM. On the other hand, higher CAS in case of copper was due to the ongoing Phase 6 waste removal and processing of low-grade stockpiles at Batu Hijau.
The average realized price for gold went up by 6% to $1598 per ounce while it declined by 25% to $2.85 per pound of copper. Despite the rise in CAS figures, Newmont maintained its original outlook for gold and copper CAS of between $625 and $675 per ounce and $1.80 and $2.20 per pound, respectively.
Long Term Looks Solid, Near Term Challenges Remain
With chatter about QE3 refusing to die away, we expect gold prices to maintain momentum because gold is considered an inflation hedge when the dollar weakens on the back of increased money supply. With the Eurozone refusing to come up with a credible solution to its woes, our view is reinforced. However, Newmont’s ability to take advantage of the market situation will depend on how well it tackles operational challenges.
The company’s direct mining costs are increasing due to declining grades, increased royalties and other costs like those related to energy. In addition, it is facing stiff challenges from the local population at its Conga project in Peru which has slowed down development at the site. This has caused Newmont to lower its attributable capital expenditure to $2.7 -$3 billion this year, down from the earlier projection of $3 – $3.3 billion. Conga was expected to begin production in 2014 but might be delayed further. Among other projects, Akyem in Ghana is expected to 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. 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.
We are currently in the process of updating our estimates in the light of recent earnings.