At the beginning of the current year, the gold price was trading at just under $1,700 per oz. Since then, the price has gradually declined to its present day price of below $1,250 per oz. The falling gold price proved to be more than trouble for gold miners, as they have witnessed considerable decline in share prices. The mining sector is one of the worst performing sectors so far this year. But as far as the future outlook is concerned, there are expectations that the price of gold will rise slightly and begin trading in the range of $1400.I believe that the mining industry will also begin to recover.
Having said so, I do not believe that Newmont Mining Company (NEM) isin a position to capitalize on this recovery. Throughout this article, I will be critically analyzing the current status of the company's ongoing projects and its mining dynamics.
Newmont, along with its subsidiaries, is engaged in the acquisition, exploration and production of gold and copper properties. It has been primarily operating in seven countries: the United States, Australia, Peru, Indonesia, Ghana, New Zealand and Mexico. The company has an aggregate land position of almost 29000 miles with proven and probable reserves of 99.2 Moz.
Slow Upcoming Projects
Newmont's future seems uncertain due to the declining reserves and hindrance in completing upcoming projects. Reserves in the Peruvian mine, based in Yanacocha are deteriorating. In 2012, the company reported that it had 3 million ounces of gold reserves left. Up until the 3rd quarter of 2013, the company had extracted 132,000 ounces of gold. Similarly, the estimates reveal that Newmont's Yanacocha mine will only have reserves for another 6 years. Owing to the deteriorating reserves of the mines, there is a dire need for further exploration so the production targets can be met.
On the other hand, new replacement projects seem too difficult to start. Conga is a substitute for Yanacocha mine, but this project has been faced by staunch opposition from the local community. The $5 billion project is expected to start in 2015 and has been suspended for more than a year. However, the disgruntled public sentiment can add further delays.
Having realized the challenging situation, the management, as disclosed in the annual report 2012, is now considering investing in and reallocating capital to different and better opportunities in countries such as Australia, Indonesia and the US, but those plans are for the distant future. Presently, Newmont failed to show clear direction, as it has been facing difficulties in implementing effective strategies.
Poor Grade of Gold is Hurting Future Prospects
The table below shows the grade of gold of major mining companies such as Barrick Gold (ABX), Goldcorp (GG) and Newmont Mining, along with the average grade of gold produced within the industry. The grade of gold is given both in grams per ton and ounces per ton. Notice that Newmont has the lowest grade of gold compared to other competitors and the industry average as well.
Owing to the low grade gold profile of Newmont, the company has to drill more to get the equivalent amount of gold that is being extracted by Barrick and Goldcorp. Consequently, it has to spend more money. The table below demonstrates the sustaining costs of Newmont in comparison to other miners.
Moreover, it is of worth mentioning that the cash margin of the company is also the lowest among the three. Although, in the recent quarter, the company reported that it had lowered its costs, I don't believe this success will be long lived. So, despite lagging behind its competitors in some regards, Newmont has more proven and probable gold reserves than that of Goldcorp, but its sustaining cost is highest as compared to peers.
Source: Investors Presentations
Newmont seems to be appreciated due to its improved quarterly performance, which is marked by its lower AISC and CAS (cost attributable to sales). The investors' appreciation is rightly reflected through the higher forward P/E ratio as can be seen in the table below.
Owing to the lower cash margins, Newmont, based on my observation, does not deserve to be traded at such a high multiple. In addition to this, there are no significant growth projects in the pipeline that can elevate the production. That is why I believe that the company doesn't deserve a high multiple at this time and is overvalued.
The company has been facing severe problems in starting its $5 billion Conga project. The officials of the company are hopeful that the production shortage caused by the delay will be resolved shortly. However, with the passage of time, the project will also become more costly and cause production shortages.
In addition to the poor performance of the projects, the poor grade of gold is also hindering the company's ability to mine cost effectively. Based on the above mentioned arguments, I do not believe that Newmont presents itself as an attractive investment opportunity.