As gold is once again trading below $1,300, gold miners are under pressure. However, Newmont Mining (NEM 1.78%) 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 (ABX 2.98%) 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 (GG +0.00%), 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.
