Gold's Plunge Will Tarnish Newmont Earnings Tomorrow

Newmont Mining (NYSE: NEM  ) will release its quarterly report tomorrow, and given the huge drop in gold prices early in the quarter, things aren't looking good for the company's profit potential. Yet as one of the leaders in the industry, the company is better poised to survive falling prices than some of its smaller peers, and the sizable drop in Newmont earnings could merely be a brief lull in a longer-term bull market if bullion prices bounce back.

Newmont is actually one of the most profitable miners in the business, with its combination of strong production and reasonable costs combining to produce impressive amounts of net income. Yet necessarily, when gold prices drop several hundred dollars per ounce, those profits are going to get squeezed hard. Let's take an early look at what's been happening with Newmont Mining over the past quarter and what we're likely to see in its quarterly report.

Stats on Newmont Mining

Analyst EPS Estimate

$0.41

Change From Year-Ago EPS

(31%)

Revenue Estimate

$2.06 billion

Change From Year-Ago Revenue

(7.4%)

Earnings Beats in Past Four Quarters

1

Source: Yahoo! Finance.

How far will Newmont earnings fall?
Analysts have made big cuts to Newmont earnings estimates in recent months in light of the drop in gold. For the June quarter, they've reduced expectations by more than 45%, while also chopping 40%-45% from their full-year 2013 and 2014 consensus figures. The stock has largely stabilized, with further losses of just 5% or so since late April.

We've actually already gotten some good figures on what Newmont's quarter will look like from its operational results a couple weeks ago. In the report, Newmont said that production fell 1% from the year-ago quarter to 1.17 million ounces, while copper production fell a much sharper 10.5% to 34 million pounds. Sales, though, rose for both metals, with gold sales climbing 6% to 1.21 million ounces and copper rising to 37 million pounds, a 32% rise from the year-ago quarter.

The big problem for Newmont and its peers has been the drop in prices not just of precious metals but for other mined products as well. Weaker revenue has forced companies to take painful steps to cut costs, with Newmont having chosen to eliminate a third of its jobs in Colorado in an effort to reduce overhead. Several other companies are instituting layoffs to preserve cash.

Yet there could be another shoe to drop. Across the industry, companies that have tied their dividends to prevailing bullion prices or financial results have had to pull back on their payouts. For instance, Silver Wheaton (NYSE: SLW  ) reduced its second-quarter dividend from $0.14 per share to $0.12, and the drop would have been larger if the company hadn't changed its calculation method to smooth changes in operating cash flow by looking back over four quarters. Hecla Mining (NYSE: HL  ) cut its dividend by 80% in May, and with silver prices having fallen further, the dividend could potentially disappear in the future. Newmont reduced its dividend by 18% in the first quarter, reversing its most recent increase the previous quarter. But with gold another 20% lower, further cuts could be imminent.

In the Newmont earnings report, watch to see if the company comments on any plans it has to try to take advantage of lower prices by making strategic acquisitions. With its leadership position, Newmont has the ability use a bargain-shopping opportunity to buy beaten-down smaller competitors and pick up potentially lucrative long-term assets. With the Federal Reserve in no hurry to push rates up, gold might not be in the new bear market that its naysayers believe, and today's depressed levels could give you the perfect chance to get in on Newmont.

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Click here to add Newmont Mining to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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