Newmont Mining (NYSE:NEM) will release its first quarter earnings on Friday. After posting a loss in the fourth quarter of 2011, we expect the company to report a fourth straight increase in revenue while jumping into profitability primarily due to gold and copper prices recovering in the period. Putting a damper on out expectations could be lower copper volumes and increased input costs. We would be closely watching the earnings announcement for any hints by the company on the recently released environmental study report by the Peru Government.
Newmont is the world’s second largest gold miner, with operations in the Asia Pacific, North America, South America and Africa. It competes with other miners such as Barrick Gold (NYSE:ABX), Goldcorp Inc. (NYSE:GG) and Freeport McMoran (NYSE:FCX).
We currently have a $68 price estimate for Newmont’s stock, implying a nearly 40% premium to the market price.
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Global economic instability has kept the to gold demand intact as investors look for safe investment options. We see higher realized prices for gold compared with as seen in both year ago quarter and last quarter of 2011. This coupled with a higher production and shipments should result in strong performance by the gold division.
Copper sales volume, however, is expected to fall due to lower ore grades and mill throughput in Batu Hijau mines at Indonesia. Average realized will be lower on a year-over-year basis, but will improve on a sequential basis.
High input costs such as fuel and labor costs will keep the margins in check.
Conga Environmental Study Report Out, What Next?
Newmont’s $4.8 billion gold mining expansion plan at Conga had hit a roadblock after concerns raised by local residents. In the wake of protests, the Peru Government has conducted an environmental study, whose results were recently released. The report endorses the Newmont’s project but recommended certain improvements. These recommendations will however result in increased costs of the project, which is already delayed by five months.  The company may disclose its prima-facie response to the recommendations.
The company’s decision could have a significant impact on our valuation as the gold constitutes nearly 90% of our current price estimate.
Long Term Outlook Solid
Still, we believe that Newmont’s planned projects and resource base make the company fundamentally strong given the strong demand for the gold from emerging markets. Gold should continue its bull run given the high inflationary expectations.
Further after near-term slowdown, we expect copper consumption in China to pick back up thanks to growing demand from the renewable energy sector and several 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 around the globe.Notes:
- Newmont’s Peruvian Gold Project Subject to New Conditions, Bloomberg, April 22 2012 [↩]