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Richard Cox, Market Bulls (59 clicks)
Macro, commodities, medium-term horizon, contrarian
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So far this year, we have seen some relatively impressive short-term gains in gold futures and in commonly traded ETFs like the SPDR Gold Trust ETF (GLD). Whether or not these gains can continue is questionable, and this is an issue I have covered in other articles. But the improving scenarios in gold markets have done little to help companies like Newmont Mining (NEM), and the best evidence of weakness has been confirmed in the miner's latest earnings report. But is the worst now over for Newmont Mining? Unfavorable valuations relative to many of its peers and a vulnerable sustainability in its dividend payouts suggest that the company's stock could remain under pressure for an extended period of time.

Earnings Weakness

Newmont reported fourth-quarter losses of nearly $1.2 billion ($2.33 per share), after reporting $673 million ($1.36 per share) for the same period in the year previous. The quarter's adjusted net income (excluding items) came in at $167 million ($0.33 per share), down sharply from the $552 million ($1.11 per share) seen last year. Net sales fell to $2.17 billion. To gain some perspective of the disappointment, consensus estimates were calling for earnings of $0.44 per share and the significant miss sent the stock to new lows below $23.

So while Newmont managed to make significant gains in its fourth quarter production volumes, the broader declines in gold bullion prices contributed substantially to the 12% fall in overall revenues. Falling values in gold bullion forced Newmont to downwardly adjust its reserve by 11%, and impairment charges put the company in negative territory in its adjusted net income. Newmont said the company expects productivity levels in gold to rise to 4.8-5.2 million ounces through 2016, at lower cash costs. But, on the whole, the stock is likely to continue facing headwinds, even if we start to see improved stability in the underlying gold price.

Dividend Cuts: More to Come?

This is because the potential for problems in Newmont stock extends in other directions, as well. The company's inability to maintain its dividend payouts was made clear last week, as Newmont announced a dividend cut of 25%. This removes a key advantage of holding the stock, given the current low-interest rate environment that we are seeing in the markets. But what is worse is that there is reason to believe that Newmont will be forced to cuts its dividend yet again, and this will undoubtedly put even greater pressure on the stock.

This outlook is based on the fact that Newmont was forced to cut its dividend in order to maintain some level of flexibility in its balance sheet. The dividend reduction could free up as much as $200 million in cash for the company, with gold prices hovering near $1,250 per ounce for the remainder of the year. The reductions take effect in the second quarter, and dividend payouts will drop by roughly 85% for the last three quarters of this year (from $0.45 per share to $0.075 per share). For Newmont, the central negatives come from its shrinking dividends, impairment charges, and declining reserves. This will mean continued pressure in NEM stock for the remainder of this year.

Chart Perspective: NEM

(click to enlarge)

(Chart Source: OT Trend)

On a 2-year time horizon, the downside trajectory in NEM has been orderly and the downtrend is clearly defined by consistent lower highs after hitting its late-2011 peak. As long as prices hold below historical resistance near $35, the bias remains negative and new long-term lows are expected.

Source: Newmont Mining: Watch For Further Dividend Cuts