Newmont Exceeds Estimates - Analyst Blog

Mining giant Newmont Mining Corporation's (NEM) third quarter 2010 earnings (excluding extraordinary charges) of $534 million or $1.08 per share exceeded the Zacks Consensus Estimate of 95 cents and the prior-year earnings of $387 million or 79 cents per share.

Including one-time charges, the company earned $537 million or $1.09 per share, an increase of 38% from the year-ago quarter of $388 million or 79 cents per share. Robust earnings were helped by higher gold prices. Newmont realized gold prices of $1,221 per ounce while copper prices were $3.67 per pound.

Quarterly revenues climbed 30% year over year to $2.6 billion on higher gold and copper prices, and also surpassed the Zacks Consensus Estimate of $2.5 billion. Gold production increased 7.7% to 1.4 million ounces at costs of $477 per ounce. Costs applicable to sales increased 18% year over year in the reported quarter based on higher waste mining and royalty costs, strong Australian dollar coupled with higher-cost production from the Boddington mine and lower production in South America partially offset by higher production in Africa.

Regional Production and Costs

North America: In Nevada gold production declined 7% from the comparable year quarter to 453,000 ounces in the third quarter. The declining gold production during the quarter was attributed to lower output at the underground mines of Carlin and Twin Creeks along with lower gold quarry ore feed due to slope failure and the completion of Underground mining at Deep Post in 2009.

Following commencement of production from the Soledad and Dipolos pits in January 2010, gold production increased 75% at mines in La Herradura (Mexico) to 42,000 ounces. Costs per ounce increased 32% in the third quarter of 2010 from the comparable quarter due to higher mining costs associated with two new pits.

South America: Gold production at Yanacocha in Peru was down 35% to 182,000 ounce resulting from mine sequencing and lower ore grades. Cost of sales was $420 per ounce up 43% due to lower production, higher waste mining and maintenance costs.

AsiaPacific: At Boddington, Newmont produced 180,000 ounces of gold at a cost of $617 per ounce and 14 million pounds of copper at $1.81 per pound. Production in the first two months of the quarter was low due to unplanned mill maintenance resulting in under utilized resources. In September both gold and copper production shot up due to higher mill grades.

At Batu Hijau (Indonesia), gold and copper production increased 14% and 9% to 106,000 ounces and 69 million pounds, respectively, at costs applicable to sales of $211 per ounce and $0.65 per pound, respectively. Costs increased 19% and 30% for gold and copper, respectively, due to higher waste mining costs.

During the quarter, Phase 6 mining and Phase 5 waste removal were delayed as access to the bottom of the pit was barred due to unexpectedly high rainfall. This, in turn, led to a high stock pile of ores. Newmont plans to suspend mining at the bottom of Phase 5 and process ores from stockpiles as it intends to start mining for the Phase 6 waste removal. Starting from 2014, the company expects Phase 6 to become the primary ore supplier.

However, gold production at other Australia/New Zealand operations decreased slightly by 2.7% year over year to 284,000 ounces at costs of $552 per ounce. Production declines were driven by lower ore grades at Jundee and Waihi mines partially offset by higher ore grade and recovery at Kalgoorlie and Tanami. Lower production and a stronger Australian dollar increased costs by 5%.

Africa: Third quarter gold production at Ahafo in Ghana accelerated 8% from the prior-year quarter to 156,000 ounces. However, costs declined 5% to $422 per ounce due to higher production and increased ore stockpiles partially offset by higher milling costs.

Margins and Liquidity

Operating margins came in at 61%, higher than 58% in the year-ago period. Newmont has a strong liquidity position with cash and cash equivalent of $4.0 billion as of September 30, 2010.

Outlook

The company trimmed the upper end of its equity gold production guidance from 5.3 to 5.5 million ounces to 5.3 to 5.4 million ounces for the fiscal year 2010. Based on higher gold prices and weak foreign exchange currency effects Newmont also raised its cost guidance for 2010 to a range of $485 to $500 per ounce from its previous guidance of $460 to $480 per ounce.   

Newmont also brought down its 2010 outlook for capital expenditure from $1.4 to $1.6 billion to $1.3 billion to $1.5 billion.  About 30% is likely to be invested in each of the North American and Asia-Pacific regions, and the remaining 40% at other locations. About 40% of these expenditures are related to the ramp up activities at the Akyem project in Ghana, the Conga project in Peru, Hope Bay in Canada and the Nevada project portfolio. 

Zacks Recommendation

Denver, Colorado-based Newmont Mining Corporation is one of the world's largest producers of gold, with several active mines in Nevada, Peru, Australia/New Zealand, Indonesia and Ghana. Based on the lowered gold production guidance of Newmont we expect the estimates to go down. Currently, Newmont has a short-term (1 to 3 months) Zacks #3 Rank (Hold) and a long-term (6 months and higher) Neutral recommendation.