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Newmont Mining (NYSE:NEM) will release its second quarter earnings results on July 25. The company has already released attributable production data for the quarter. The production for both gold and copper was lower than in the comparable period last year. However, shipments of both gold and copper increased year-over-year, reflecting sales of leftover inventory from previous quarters. The average price of gold for the first quarter this year was much lower than the price in the same quarter last year. Considering the relatively minor increase in shipment figures compared with the steep fall in prices, we conclude that Newmont will report lower revenues on a year-over-year basis. [1]

Right now, gold mining companies across the world are bleeding due to falling prices and rising production costs. Fears over easing monetary stimulus by the U.S. Federal Reserve Bank in the coming months have spooked the gold market. As a result, prices have declined steeply in a very short period of time affecting free cash flow of gold mining companies. This could lead to dividend cuts for Newmont shareholders as the company has linked its dividend payouts to realized gold prices.

Q2 2013 Production

Newmont reported second quarter attributable gold and copper production of 1.16 million ounces and 34 million pounds respectively. The production of gold was lower compared to the previous year’s comparable period figure of 1.182 million ounces, and that of copper was lower than the Q2 2012 figure of 38 million pounds. Attributable gold and copper sales were 1.213 million ounces and 37 million pounds respectively. These compare to the figures of 1.140 million ounces of gold and 28 million pounds of copper last year. [2] The average realized price for gold was reported at approximately $1,415 per ounce. While the company didn’t report the realized price for copper, it will definitely be much lower than last year considering the copper price charts on the London Metal Exchange (LME). [3]

Newmont has maintained its full year 2013 attributable gold and copper production of 4.8–5.1 million ounces and 150–170 million pounds, respectively.

Gold And Copper Prices

The price of gold suffered a nearly 15% drop in the second half of June alone. It touched a new low of $1,180 per ounce towards the end of June before rebounding slightly to cross the $1,200 mark. Things were set into motion after Ben Bernanke announced that if the U.S. economy and the job market continue to improve, the quantitative easing program could be reduced or withdrawn later this year. Right now, the Federal Reserve is pumping nearly $85 billion into the economy every month.

While gold is currently trading within a considerably narrow price band of $1,200-1,300 per ounce, we think prices will continue to be very sensitive to further announcements about quantitative easing. The continuation of monetary stimulus depends on the pace of economic recovery and Bernanke has indicated that employment figures will be key in determining the Federal Reserve’s next steps. A recovering economy may accelerate the shift of funds to equity from precious metals, contributing further to the price decline. [1]

The falling price of gold affects Newmont quite adversely. In the first quarter this year, it reported a production cost of $1,115 per ounce of gold. [4] At the prevailing market prices, it will hardly be able to generate significant free cash flows which will affect investment in future growth projects. Low prices will also affect the company’s ability to pay dividend to shareholders. The impact of this quarter’s low prices will be felt in Q3 dividends because Newmont links quarterly dividend to the previous quarter’s realized gold price. The realized price in the first quarter was $1,632 per ounce, much higher than the $1,415 per ounce realized in the second quarter. Thus, Q3 dividends will be lower than the $0.35 per share figure for Q2. [5]

Copper prices have been trending lower mainly due to the slow economic growth rates in China for the last three quarters. Since China accounts for nearly 40% of the total world consumption of copper, its economy has a significant impact on copper prices. The country is in the process of reorienting its economy away from investment in capital assets and towards greater domestic consumption. Also, exports have fallen. China reported a GDP growth rate of 7.5% in the second quarter this year, a far cry from its double-digit growth rate days. The overall impact in the copper market has been the creation of a supply surplus which is depressing prices. We expect low copper prices to persist for the rest of the year. [6]

We have a Trefis price estimate for Newmont Mining of $41 which will be revised after the second quarter earnings results.

Notes:

  1. Gold Price Charts, Kitco
  2. Newmont Announces First Quarter Attributable Gold and Copper Production and Sales, Newmont Press Release
  3. LME Copper Prices, LME
  4. What is the Cost of Mining Gold?, Visual Capitalist
  5. Newmont Declares Quarterly Dividend of $0.35 per share, Newmont News Release
  6. China Q2 GDP growth Slows To 7.5%, China Daily

Disclosure: No positions

Source: Newmont Results Will Be Soft On Weak Gold And Copper Prices