Newmont Plunges Along With Gold

| About: Newmont Mining (NEM)

By Cagdas Ozcan

Newmont Mining (NYSE:NEM) lowered its capital expenditures by $100 million due to weak financials for the first quarter 2013. Aside from that, consolidated spending for the quarter was also reduced by $217 million. This is approximately 13% lower than the consolidated spending for the first quarter of 2012.

Major areas of the balance sheet and of the income statement are down versus the same period last year. This is partly due to reduced production of gold compared with the same quarter a year ago. Newmont's gold production significantly decreased from 1.307 million ounces to 1.165 million.

In contrast, copper production for the first quarter this year is higher compared with last year's first quarter production. Newmont produced 35 million pounds of copper during the first quarter of 2012. In the first quarter of this year, the copper production increased to 38 million pounds.

Despite the increase in copper segment, revenues and net income experienced a sharp fall this year. Gold is still the major revenue driver of Newmont. Any significant increase or notable decrease in gold production will greatly affect the sales and profitability of the company.

Main Highlights

Newmont reported a very disappointing 41% drop in first-quarter net income from $603 million in the year-ago quarter to $357 million. While sales decreased for the same period, the plunge is only 18%. The reported attributable net income from operations is down 44% at $315 million versus last year's $561 million. As a result, per basic share decreased from $1.13 during the first quarter of 2012 to only $0.63 this year.

In the cash flow statement and in the balance sheet, the figures are not encouraging as well. Cash and cash equivalents decreased from $1.561 billion at the end of December 2012, to $1.378 billion last quarter. Total liabilities, on the other hand, slightly improved from $12.702 billion to $12.326 billion.

The above results were already expected as previously reported by Newmont. The relatively weak first-quarter financial performance was influenced by several factors. One of them is the lower grade at Twin Creeks and Carlin in Nevada. Moreover, the company encountered shipping delays, resulting in lower concentrate sales.

The above poor performance is not inclusive yet of the performances of Newmont during the fall of the gold market. The data were based on the average realized price per ounce of gold at $1631. On the other hand, copper's average realized price was $3.13 per pound. Obviously, this is no longer the average price for the second quarter, especially after the major gold plunge. Therefore, the second-quarter performance is expected to be worse than the first quarter, unless Newmont makes a major turnaround.

Plunge of Share Price

The gold market was heavily battered in the second week of April. SPDR Gold (NYSEARCA:GLD) ETF lost 15% during that fall. There are several possible reasons why gold took a plunge. One of them is the modified monetary policy of the Federal Reserve Bank. Other reasons are the Cyprus incident, and the weak economic growth of China that failed to meet the estimates.

During the fall, all gold miners were greatly affected including Newmont. On April 15, Newmont fell 6.7% from $36.37 to $33.78 per share. Two days later, the shares plummeted further to the lowest price point of the year at $32.36. The year-to-date performance at that time was -31%. However, shares eventually started to rebound. As of April 29, Newmont shares closed at $33.97with year-to-date loss of -27.5%.

The recent fall of gold, according to some experts, was the result of speculative trading by the futures market. The demand is there and it is continuously rising. In some countries, the demand even climbed during the fall of the gold price. In fact, in India there was increased buying of physical gold when the price fell. Today, gold prices have started to increase, and it may continue to rise in the next few months.

Newmont has also corrected from the lowest price point of the year. While the correction process is relatively slower compared with the market, Newmont shares might eventually recover from the fall.

Market Outlook for Newmont

Despite poor results in the first quarter, Newmont still expects to produce about 4.8 to 5.1 million ounces of gold. For copper, its projected output for the entire year is 150 million to 170 million pounds. The company sees an increase in production in the second half of the year. This projection is based on the assumption that the first production at Akyem, Ghana, will push through. It is expecting higher mill throughput in Nevada, as well.

Analysis and Recommendations

Newmont continuously pays dividends to its shareholders. I expect to company to keep its dividends this year in spite of the lower net income. In fact, it has been giving dividends since 2004. The payout amount for this year was even increased from $0.35 to $0.425 per share. This gives shareholders another way to reduce losses from the market fall.

Aside from that, the earnings per share are still in the green for the past three years. Hence, there is no loss potential per share, despite the market fall of gold. As long the company meets its projected gold production year over year, Newmont might bounce back along with the market. However, I doubt that the company will meet its projections.

Nevertheless, the majority of the analysts share the same optimistic outlook for Newmont. Out of 17 analyst firms in Nasdaq, eight of them recommended a strong buy, while one firm voted for buy. Seven analysts advised a hold. On the contrary, one voted for a sell.

Newmont closed at $33.97 per share on April 29. The one-year target of NEM was pegged at $51. There is a chance that this price level will be attained within the year if the gold market fully rebounds. Newmont has a market capitalization of $16.7 billion. Its current P/E ratio stands at 9.36, while the forward P/E is 10.17. With a good P/E ratio and a sound market capitalization, Newmont is relatively safe for investment with good potential for capital appreciation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Efsinvestment is a team of analysts. This article was written by one of our equity analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.