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The Fall of a Giant: Gurus’ Exodus from Newmont Mining Corporation
Posted by: Patricio Kehoe (IP Logged)
Date: December 18, 2013 04:47PM

After experiencing a surge in prices over the past two years, which saw the metal trade at $1,700 per ounce, the prolonged drop in the value of gold has been troubling industry giants since June 2013. And, with no end to the depressed gold prices in sight, which are hovering around the $1,250 per ounce mark, the industry will continue facing an important challenge. Considering this market trend, even Newmont Mining Corporation (NEM), one of the world’s largest gold producers, will face a troublesome 2014.

Gurus Bearish Regarding Newmont

One of the strongest signals regarding Newmont’s poor performance this year is the shedding of massive amounts of stock by investment gurus. John Hussman, Donald Smith, along with the investors at PRIMECAP Management and NWQ Managers, have been reducing their stake in the gold mining firm as of late. In addition, T Boone Pickens and Julian Robertson sold their entire holdings in the firm. With such heavy selling going on, shareholders and investors should not be too excited regarding Newmont’s performance throughout 2014. Nevertheless, a further look into the company’s fundamentals is necessary to understand why the coming year will produce moderate results at best.

Soaring Costs and Little Room for Expansion

Due to Newmont’s huge size, the company is bound to have major difficulties expanding its gold output over coming years. In addition, the firm’s average cash-costs per ounce of produced gold exceed the $1,000 mark, making it a relatively high-cost miner. Hence, Newmont’s ability to counteract dropping gold prices through increased production or reduced operational costs are very limited. Even a troubled rival such as Barrick Gold Corp. (ABX) has lower cash costs – averaging $912 per ounce – and yet has not been able to pick up the pace going into 2014. So where does that leave Newmont? Well, new projects might mitigate losses, so let’s take a closer look at some of the latest developments on that front.

Peru Is Ttrouble  the Asia-Pacific Region Too

Despite what seems to be promising development opportunities a few years back, Newmont’s Conga project in Peru has become a burden for the gold miner. Local social and political opposition to the company’s activities in the South American nation have put one of its most important projects on hold. Retracting production targets are thus already weighing on Newmont, which continues to believe in the growth potential behind this operation.

The company’s assets in the Asia-Pacific region are also generating poor results, particularly due to the lower-grade ore that is being extracted. This is a result of the maturity the mines have achieved, and means Newmont will face rising separation and extraction costs in the region.

Overvalued Considering Its Future Outlook

Unlike the poorly performing Barrick Gold, which has a forward price to earnings of 7.75, Newmont’s share price is trading at 19 times its earnings. Considering Newmont is not exactly over-performing compared to Barrick, the stock is clearly overvalued. Nevertheless, it does offer shareholders some attractive features, which makes holding on to it an option, for those already owning a stake in the firm. The 5.3 percent annual dividend yield for example is noteworthy compared to Barrick Gold’s 2.9 percent, and returns on invested capital are still at 16.7%.

With projected earnings per share at 10.9%, which is considerably above the industry average, and an astonishing operating margin of 32.5%, not all is lost for Newmont. The firm’s improved performance, however, which is largely responsible for the stock’s appreciation, does not counteract the negative signals entering into 2014. The severe problems facing the $5 billion Conga operation, the lack of new projects in the pipeline, along with rising costs at several extraction sites, have me feeling rather bearish regarding Newmont.

Disclosure: Damian Illia holds no position in any stocks mentioned.

Guru Discussed: Donald Smith: Current Portfolio, Stock Picks
John Hussman: Current Portfolio, Stock Picks
Stocks Discussed: NEM, ABX,
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