Will Newmont Mining Surprise Again?

| About: Newmont Mining (NEM)

Summary

Newmont Mining is scheduled to report its fourth-quarter 2015 financial results on Wednesday, February 17, after market close.

According to 16 analysts' average estimate, the company is expected to post a profit of $0.15 a share - a 12% decline from its actual earnings for the same quarter a year ago.

According to my calculations, Newmont's earnings fell about 7% in Q4 2015 compared to the same quarter a year ago, which is much better than the 12% decline estimate.

The company's valuation is pretty good, the stock is trading below book value, and the price-to-free-cash-flow ratio is very low at 9.93, the fourth lowest among all S&P 500 basic materials.

In my view, Newmont stock is well positioned to achieve high capital gains when the gold price starts to recover.

Click to enlarge

Newmont Mining (NYSE:NEM) is scheduled to report its fourth-quarter 2015 financial results on Wednesday, February 17, after market close. According to 16 analysts' average estimate, Newmont is expected to post a profit of $0.15 a share - a 12% decline from its actual earnings for the same quarter a year ago. The highest estimate is for a profit of $0.24 a share, while the lowest is for a profit of $0.05 a share. Revenue for the fourth quarter is expected to decrease 9.1% year over year to $1.83 billion, according to 7 analysts' average estimate. There was one EPS up upward during the last seven days, three up revisions, and five down revisions during the last 30 days. Since Newmont has shown significant earnings per share surprise in each of its 7 last quarters, as shown in the table below, there is a good chance the company will beat estimates in the fourth quarter too.

Data: Yahoo Finance

Since the beginning of 2015, NEM's stock is up 8.7%, while the S&P 500 index has decreased 5.8% and the Nasdaq Composite index has lost 2.4%. However, since the beginning of 2012, NEM has lost 65.8%. In this period, the S&P 500 index has increased 54.2% and the Nasdaq Composite index has risen 77.4%.

NEM Daily Chart

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NEM Weekly Chart

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Charts: TradeStation Group, Inc.

Newmont Mining is one of the world's largest gold producers and the only gold company included in the S&P 500 index. It is also a major producer of copper and zinc. Gold is the primary product of the company and accounts for about 90% of its sales.

Newmont's last quarter average realized gold price of $1,104 per ounce has dropped 6.4% from its previous quarter and 13.1% from the same quarter a year ago. Trying to figure out the average realized gold price for the fourth quarter 2015, I have calculated the average daily gold price for the third and the fourth quarters. According to my calculations, the average gold price fell 1.8% in the fourth quarter compared to the previous quarter. As such, I assume NEM's average realized gold price fell at the same rate in the last quarter to $1,084 per ounce.

Gold April 2016 Leading Contract

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Chart: TradeStation Group, Inc.

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* My estimate

Assuming the all-in sustaining gold costs in the fourth quarter were the same as in the third quarter, gold margin might have dropped in the last quarter about 7.4% from the previous quarter and 6.7% year over year to $249 per ounce. Hence, I assume NEM's earnings fell about 7% in Q4 2015 compared to the same quarter a year ago, which is much better than the 12% decline, according to 16 analysts' average estimate.

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* My estimate

Valuation

Newmont Mining's valuation metrics are pretty good. The stock is trading below book value; its price-to-book is very low at 0.94. The trailing P/E is at 22.10, and the price-to-free-cash-flow ratio is very low at 9.93 - the fourth lowest among all S&P 500 basic materials companies. The Enterprise Value/EBITDA ratio is also very low at 5.75, also the fourth lowest among all S&P 500 basic materials companies.

The 10 S&P 500 basic materials stocks with the lowest EV/EBITDA ratio

The 10 S&P 500 basic materials stocks with the lowest price-to-free cash flow ratio

Source: Portfolio123

The company pays a dividend. The forward annual dividend yield is at 0.49%, and the payout ratio is only 10.5%.

Summary

Newmont Mining is scheduled to report its fourth-quarter 2015 financial results on Wednesday, February 17, after market close. According to 16 analysts' average estimate, the company is expected to post a profit of $0.15 a share - a 12% decline from its actual earnings for the same quarter a year ago. There was one EPS up revision during the last seven days, three up revisions, and five down revisions during the last thirty days. Since Newmont has shown significant earnings per share surprise in all its seven last quarters, there is a good chance that the company will beat estimates also in the fourth quarter. Assuming the all-in sustaining gold costs in the fourth quarter were the same as those in the third quarter, the gold margin might have dropped in the last quarter about 7.4% from the previous quarter, and 6.7% year over year to $249 per ounce. Hence, I assume NEM's earnings fell about 7% in Q4 2015 compared to the same quarter a year ago, which is much better than the 12% decline, according to 16 analysts' average estimate. Newmont Mining's valuation metrics are pretty good. NEM stock is trading below book value, and the price-to-free-cash-flow ratio is very low at 9.93 - the fourth lowest among all S&P 500 basic materials companies. The EV/EBITDA ratio is also very low at 5.75 - also the fourth lowest among all S&P 500 basic materials companies. In my view, the stock is well positioned to achieve high capital gain when the gold price starts to recover.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.