Rising Production Does Not Make This Gold Miner a Buy

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As gold is once again trading below $1,300, gold miners are under pressure. However, Newmont Mining (NYSE: NEM  )  recently released its third quarter production data, which is worth looking into. The company's gold production rose 10% sequentially. This is positive news for a company that has lost more than 40% of its capitalization this year, but is it enough to start a new trend?

Production is not the only factor to consider
If production was the sole thing that mattered, shares of Barrick Gold (NYSE: ABX  ) would have been among the best performers. The company expects to produce 7 million to 7.4 million ounces of gold this year. Yet, Barrick has lost half of its value since the beginning of 2013. In comparison, Newmont Mining expects to produce 4.8 million to 5.1 million ounces of gold.

On the contrary, Goldcorp (NYSE: GG  ) , with production guidance between 2.55 and 2.8 million ounces, has the biggest capitalization among these miners. The combination of low debt levels and all-in sustaining costs under $1,100 per ounce has helped Goldcorp outperform its peers.

The most positive news for Newmont Mining is that its Nevada mine is back on track. This mine has increased production by 22% sequentially. This is very important, because this mine accounted for 36.5% of total production in the third quarter.

While Newmont's gold production rose 10%, sales rose only 4%. The rationale behind this development is simple: The company expects gold prices to rise, and wants to sell more gold at a higher price. However, this tactic could be detrimental to earnings should gold prices stay at low levels for a prolonged period of time.

What about the costs?
Newmont is scheduled to report its third-quarter results after the market closes on October 31. Currently, the company is expected to report a profit of $0.31 per share, down 26% from second-quarter results. We know that the company has managed to produce more gold, but was it able to cut costs as well?

Newmont expects its all-in sustaining costs to be between $1,100 and $1,200 per ounce in 2013. This is worse than Goldcorp's $1,000-$1,100 expectation, as well as Barrick's $900-$975 cost guidance. But more importantly, a $1,200 per ounce cost is frighteningly close to the current gold price.

In my opinion, Newmont remains an underdog among the biggest gold miners. The company has neither a debt-free balance sheet not the best costs. It also has no huge projects, like Barrick's Pascua-Lama. Although this project has been a source of worry for investors, I believe that it would contribute value to shareholders in the long term despite all the obstacles.

The local Chilean population has submitted another appeal against Pascua-Lama, but I do not think it will lead to any changes in the project. Once Barrick finishes the water-management system, it will be free to proceed with the remaining work at Pascua-Lama.

Final thoughts
I remain skeptical about Newmont's prospects. The company must show its ability to cut costs below $1,100 per ounce. Remaining in the $1,100-$1,200 range might not be enough should gold prices take a step lower.

The stock currently yields 3.9%, which could attract income hunters. However, as gold prices have stayed under $1,400 for a long time, you should expect the annual dividend to be cut to $0.8 per share according to Newmont's dividend policy.

The news on the Nevada mine is reassuring, but it is not sufficient to convince me that Newmont is finally a buy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 17, 2013, at 2:37 PM, clbjblk wrote:

    The train is still going down the track but the price is not there, it is a buy's place and there are some good PUT PLAYS but they are a few months out when the printing press money from Obama will be worth less. A good example is China and of all other countries S.Korea just passed an import export agreement that has not hit the media yet (wonder why) they can only make there purchases between each other with Gold for payment or the Chinese Yang, it is ironic that the USA helps them per say with American troops but they can no longer use the US DOLLAR FOR PAY, check it out through the embassy and now eight other countries are in talks to sign the same agreement using Gold and the Yang as there inter country trading payment. You would think the media would be all over that especially when they find out the who the eight other countries will not us the US Dollar. It is big time talk around the water fountain at the Central banks and they are all numbers people ahead of that game. The US better make there China payments of there loans on time but if they say they will only except Gold the heat will be on and the only leverage Obama has is we won't buy as much from them(CHINA) but be aware that South America is taking on a lot more Chinese trade and raw or ree materials back for pay from copper to many other resources that they are helping mine just like China is buying Canadian land at a very aggressive pace, like they say in Vancouver just look who is renting the rental cars they are not all tourist. Our US Govt borrowed money this morning today to pay for Fed debt. He meaning the commander an chief should have been working more with Canada because China has an open check book up there. Take it for what it is worth but there are some China buys out coming in Canada because he has not been a good neighbor, the funny part is that they would rather deal with us but are forced to Asia by D.C. and who owes money to who. The head fools should talk to the geologist in Canada and see who has been getting and buying info from them. There are some small Jr. Miners broke and if there property is close to other hot spots China is getting there wallet out or even buying part of there companies , and most of the TIME YOU HAVE TO BE A CANADIAN TO BY WARRANTS BY LAW. Gold will come back and it's bi products to not to mention the energy companies China has bought or bought part of , The US HAS REALLY PUSHED CANADA UNDER THE BUS AND THE PIPELINE GOES TO ASIA , I HAVE BEEN WAY UP THERE AND THOSE GUYS WHERE NOT FISHING. LONG WINTERS UP THERE BUT NOT SO BAD IN MINES UNDERGROUND. Send some fools up there you will see what I mean. There are deals coming down the pipe for the emerging market and the USA is letting it slip away. Who you gonna sell to the country that can write a check or the country that has to go borrow the money from the country that can write a check bur China is not gonna let Obama have no more checks China and even japan is in a good spot to buy from them .

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