The earnings report recently issued by Newmont (NYSE:NEM) wasn’t pretty. In fact, it helped drag the entire sector to new 52-week lows.
But at its current share price, this stock is fast becoming of value and with a dividend that is triple the S&P 500’s, it could become a prime buy opportunity in no time.
First, About That Earnings Report of Newmont
This week, Newmont (NYSE:NEM) reported its Q2 earnings, stating that it produced 1.45 million ounces of gold during the quarter and sold 1.46 million attributable ounces of gold.
These numbers showed increases of 1% and 5% from the same time last year. The production of gold-equivalent ounces (GEOs) rose 10% year over year in the third quarter to 333,000, bringing the total for the second quarter to 680,000 GEOs.
The slightly higher overall sales (1.79 million ounces vs. 1.69 million ounces) were unfortunately overshadowed by much lower metals prices, which were significantly impacted by unfavorable mark-to-market adjustments on provisionally priced transactions.
This alone had a negative effect on quarterly earnings per share compared to Q1, which more than offset the growth in sales from higher grades at Boddington, Ahafo, and Tanami.
As a result, Newmont reported a substantial shortfall on quarterly EPS of $0.46 compared to $0.83 in the same period last year and flat sales on an annual basis of ($3.06 billion).
The sharp declines in average realized prices, which came in at $1,836/oz for gold but fell even more severely to $2.99/lb for copper, $17.42/oz for silver, and $1.08/lb for zinc due to the significant delay in concentrate sales finalizing, had a significant impact on the lower revenue and higher operating costs.
Fortunately, despite the 11% year-over-year fall in free cash flow, the company still had a respectable quarter in terms of free cash flow ($514 million vs. $415 million), which was higher when adjusted for the higher capital expenditures during the quarter.
In spite of the steep fall at quarter’s conclusion, this profited from a little higher average realized gold price. Although the production and revenue performance met expectations despite being below average due to the drop in commodity prices at quarter’s end, the margin performance and prognosis were far from encouraging.
Now Here is the Good News …
Newmont (NYSE:NEM) has consolidated Yanacocha (with 100% control) and has two further projects with extremely high margins waiting in the wings (Ahafo North, Tanami Expansion). Finally, investments in innovation and technology paved the way for recovering lost margins after 2023.
Even with expenditure increases, these are still fantastic projects, with Ahafo North on target to generate 300,000 ounces at prices under $775/oz for its first five years.
At significantly reduced costs, the Tanami Expansion will lengthen the mine’s life and add between 150,000 and 200,000 ounces over the course of the first five years.
Last but not least, Yanacocha is a big deal, as is the rise in ownership to 100%, with this asset set to enjoy sub $800/oz all-in sustaining costs for the first five years and generate incremental production of more than 500,000 GEOs per year.
The bottom line is there are many things to like about Newmont, despite the difficult quarterly report. Not only is the company maintaining a robust balance sheet with $4.3 billion in cash and $7.3 billion in liquidity.
Newmont (NYSE:NEM) also has one other big thing going for it as it approaches being undervalued – it is led by knowledgeable, conservative, patient, and open leadership.
In reality, Tom Palmer, the CEO of Newmont, is one of the greatest in the industry. He has not only looked after the needs of the staff and secured their safety, but he has also successfully navigated the business through trying times.
Featured Image: Megapixl © Oat3dee
