Is Newmont Mining Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Newmont Mining (NYSE: NEM  ) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Newmont's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Newmont's key statistics:

NEM Total Return Price Chart

NEM Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

1.8%

Fail

Improving profit margin

(134.8%)

Fail

Free cash flow growth > Net income growth

(130.2%) vs. (135.4%)

Pass

Improving EPS

(135%)

Fail

Stock growth (+ 15%) < EPS growth

(47.7%) vs. (135%)

Fail

Source: YCharts. * Period begins at end of Q2 2010.

NEM Return on Equity Chart

NEM Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(129.5%)

Fail

Declining debt to equity

51.9%

Fail

Dividend growth > 25%

133.3%

Pass

Free cash flow payout ratio < 50%

Negative FCF

Fail

Source: YCharts. * Period begins at end of Q2 2010.

How we got here and where we're going
Things look extremely bad for Newmont today. This gold miner earns only two out of nine possible passing grades -- and with one awarded on a technicality, and the other backed by negative free cash flow, neither of those passes seem particularly defensible. In theory, things can't get much worse, but reality can be harsh. Is there any hope left for Newmont?

Fear of falling gold prices is currently plaguing miners across the world. As a result, many gold miners now anticipate severe risk for their upcoming projects. Fool contributor Sean Williams notes that Newmont, one of the world's largest gold miners, has already written down $1.61 billion on its Hope Bay mine in Canada, and it's expected that more writedowns are in the offing as long as gold prices continue to drop while superfluous expenses build.

The recent turmoil in gold prices arose from fears that the Federal Reserve would exit its bond-buying program. However, Newmont CEO Gary J. Goldberg expects that the company would be able to sustain gold prices between $1,100 per ounce and $1,200 per ounce in 2013, a level that has not yet been breached. With current prices in the $1,350-per-ounce range, Newmont can absorb a nearly 20% drop in gold prices without suffering too severely -- in theory, anyway.

Falling gold prices have also affected other miners such as Kinross Gold (NYSE: KGC  ) and Goldcorp (NYSE: GG  ) , whose revenues fell dramatically during the year. Sean Williams notes that Kinross has delayed the expansion plan of Tasiast mine in Mauritania because of excessive labor and production costs, estimated at $2.7 billion. Ecuador's government also demanded a large stake in Fruta del Norte project, which forced Kinross to walk away from it. Goldcorp is also weighed down by high capital costs, with a $2 billion impairment charge recently marked against its Penasquito mine. Newmont may be one of the larger players, but it's not necessarily in much better shape. A good deal of the gold mining industry's future is still out of its hands.

Putting the pieces together
Today, Newmont has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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