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This Gold Miner Could Remain Under Pressure

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While shares of major gold miners Barrick Gold (NYSE: ABX  ) and Goldcorp (NYSE: GG  ) trade higher than at the beginning of the year, shares of Newmont Mining (NYSE: NEM  ) are extending the previous year's decline. There is a substantial risk that this trend is going to continue for Newmont, as the company's preliminary 2013 operating results report revealed several weak spots.

Newmont's gold production will continue to decline
Newmont expects that consolidated gold production in 2014 will be in the range of 5 million–5.35 million ounces. This will mark a second yearly production decline in a row even if the top guidance line is achieved. In contrast, Goldcorp expects that its 2014 gold production will grow between 13% and 18%.

As gold is stuck below $1,300 per ounce, costs play a major role in the fate of every gold miner. Investors expect companies to push their costs as low as possible. Newmont expects that its all-in sustaining costs will be in the $1,075-$1,175 range, which is significantly higher than costs of $993 per ounce that the company achieved in the third quarter of 2013.

This is not a performance that will impress investors. While Barrick is yet to give color on its 2014 cost expectations, Goldcorp stated that its all-in sustaining costs will decrease to between $950 and $1,000 per ounce. This is the kind of cost reduction that one would like to see at Newmont.

More writedowns and impairments ahead
Newmont stated that it changed its gold price assumption for asset impairment testing from $1,400 to $1,300. This will inevitably lead to some impairment charges when the company presents its annual report on February 20.

In addition, Newmont plans to record a non-cash charge of $350 million to $400 million on inventory to reflect the new price assumption. Importantly, the current gold price is below $1,300. If Newmont were to sell its inventory right now, this move would have caused a bigger loss than the one that will be recorded on books.

Where will growth come from?
Newmont decided to cut its capital expenditures program by 40% in comparison with 2013. Ninety percent of this money will go to sustaining capital, while only 10% will fund growth. As Newmont expects to spend between $1.3 billion and $1.4 billion on capital expenditures in 2014, the growth capital will maximally be at $140 million.

Clearly, this is not enough to fund a big project like the troubled Conga in Peru. Newmont's CEO Gary Goldberg was asked about the growth capital during the Q&A session on the preliminary results presentation. According to him, the best option is to issue more shares if Newmont finds an attractive investment.

Secondary offerings often hurt share prices, at least in the short term. Barrick issued 160 million shares back in November, and the stock lost 15% of its value in one month before returning to higher levels. Newmont's shares trade not far from 2009 lows, so issuing new equity is hardly the best way to bring value to shareholders.

Bottom line
Newmont is likely to remain under pressure. The company's cost and production guidance is not reassuring. The situation in Indonesia, where government imposed heavy taxes on copper concentrate exports, ads to the uncertainty.

One can assume that Newmont wants to preserve its cash given the reduction in capital expenditures. It's possible that the company may revise its dividend policy, and that's no good news for income investors. All in all, 2014 could be a tough year for Newmont.

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Vladimir Zernov

Vladimir Zernov believes that fundamental analysis works best with energy and materials stocks and covers them on Motley Fool.

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Related Tickers

8/28/2015 4:00 PM
ABX $7.13 Up +0.29 +4.24%
Barrick Gold Corp. CAPS Rating: ***
GG $13.96 Up +0.28 +2.05%
Goldcorp, Inc. (US… CAPS Rating: ***
NEM $17.17 Up +0.47 +2.81%
Newmont Mining Cor… CAPS Rating: ***