On April 21, 2016, Newmont Mining Corp. (NYSE:NEM) will hold the conference call to present and discuss first-quarter 2016 financial results.
Last Quarter: Newmont Mining Corporation reported Q4 EPS of $0.04, missing the consensus estimate of $0.12.
A difference of $0.08 with a negative surprise of 66.70%.
I will examine the impact of the earnings announcement on the value of NEM. The company had a loss of 0.47 per share (Diluted Normalized EPS of 3 months ending 2015-12-31).
Event of interest: NEM's earnings announcement on February 17, 2016.
Event window (from January 19, 2016, to March 16, 2016): 20 days prior to the event day plus the event day plus 20 days post the event day.
This was 'Bad News' since EPS actual was less 2.5% less than expected. It was 66.70% less than expected.
I use the 250-trading day period prior to the event window as the estimation window (from January 21, 2015, to January 15, 2016) for this announcement ('Bad News'). So I will estimate the two-factor model parameters over the 250 days prior to the event period.
The two-factor model is as follows:
R NEM= alfa + Beta1 x R MKT+ Beta2 x Change in the COMEX
The COMEX is used as a proxy for changes in the price of gold.
SUMMARY OUTPUT | ||||||
Regression Statistics | ||||||
Multiple R | 0,568055139 | |||||
R Square | 0,322686641 | |||||
Adjusted R Square | 0,317202322 | |||||
Standard Error | 0,023137158 | |||||
Observations | 250 | |||||
ANOVA | ||||||
df | SS | MS | F | Significance F | ||
Regression | 2 | 0,062995326 | 0,031498 | 58,83805426 | 1,26625E-21 | |
Residual | 247 | 0,132226038 | 0,000535 | |||
Total | 249 | 0,195221364 | ||||
Coefficients | Standard Error | t Stat | P-value | Lower 95% | Upper 95% | |
Intercept | 0,000456404 | 0,001467456 | 0,311017 | 0,756049914 | -0,002433919 | 0,003346727 |
S&P 500 | 0,740110662 | 0,146383736 | 5,055962 | 8,34766E-07 | 0,451791104 | 1,02843022 |
COMEX | 1,582068575 | 0,159419452 | 9,923937 | 9,45266E-20 | 1,268073679 | 1,896063472 |
I run the regression tool in excel to estimate the betas which represent the exposure of NEM returns to the changes in the stock market price (S&P 500) and in the COMEX:
Newmont's daily return is less volatile than daily S&P 500's return and more volatile than the COMEX over the estimation window (from January 21, 2015 to January 15, 2016).
P-value and t-Stat value for Rmkt and COMEX tell us that the two factors are statistically significant.
RNEM* = 0.0005 + 0.74 x Rmkt + 1.58 x COMEX is the mathematical expression that roughly summarizes the normal return of Newmont Gold Corp.
Now that I have the parameters of the two-factor model, I can calculate the expected return (E(r)), the abnormal return (AR), the cumulative abnormal return (CAR) and the abnormal return t-test (AR t-test).
To calculate the expected return (E(r)), I will substitute Rmkt and changes in the COMEX with the daily returns on S&P 500 and the daily changes in the COMEX in the two-factor model over the event window, 41 days, from January 19, 2016, to March 16, 2016.
To calculate the abnormal return, we need to subtract from the daily return on Newmont Gold Corp. (which is the actual return) the expected return (E(r)) over the event window.
Then I calculate the cumulative abnormal return. The t-test is calculated as the abnormal return divided by the standard error. The standard error is 0.023137158.
The table represents the abnormal returns of Newmont Gold Corp. as well as the cumulative abnormal returns for earnings announcement of February 17, 2016, categorized as 'Bad News' since NEM's actual EPS was less 66.70% than expected:
For this 'Bad News,' there wasn't any impact on the share price either on the day that news was released or the day after.
What can we expect from the next earnings announcements?
For the next quarter, analysts expect EPS of $0.18 ranging between a low estimate of $0.00 and a high estimate of $0.34:
I expect a surprise from Newmont's earnings announcements to exceed analysts' expectations on EPS and it may be statistically significant this time.
As a cyclical stock I would expect from Newmont a bigger surprise on EPS of Q1 2016 than the one from Q1 2015.
But while the 100.00% surprise of Q1 2015 didn't have any statistically significant impact on the share price, the one that we may have on Q1 2016 EPS has more chance to be statistically significant and therefore of interest for short positions.
These are the reasons why:
Recently the stock has been downgraded by some analysts, from buy to neutral or hold. In my opinion, this might slow down the pace at which the share price is up-trending, especially on the tail wind of the last news: the sale of Duketon Gold Project will further strengthen Newmont's balance sheet and enhances its focus on its core business. Analysts' expectations on Q1 2016 EPS are lower than 1 year ago when the price of gold tumbled, therefore wider margin between actual and estimated EPS is at the near-term horizon.
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.