Newmont Mining Won't Dig Portfolio Gold
A look at Newmont's latest earnings suggests that fast growth does not necessarily mean high profitability. While Newmont is digging for gold around the world -- Ghana, North America, South America and the Asia Pacific region -- it looks like its costs are rising faster than gold prices.
With an 11% rise in revenues and an 18% profit boost, you'd think all's well at Newmont. But due to a spike in Newmont's cost to product gold -- from $507 an ounce in 2010 to $588 this year -- Newmont missed analysts' expectations by 10 cents a share (10% below expectations).
Is this a temporary problem that could make the stock more attractively priced? Or should you avoid Newmont altogether?
Here are two reasons to consider buying its shares:
- Low valuation. It trades at a Price-Earnings-to-Growth ratio of 0.80 (1.0 is fair value) — a P/E of 13.3 on earnings forecast to grow 16.6% to $5.63 in 2012.
- Higher sales and profits and decent balance sheet. Newmont sales have grown at an 18% annual rate over the last five years from $4.9 billion (2006) to $9.5 billion (2010) and its net income has surged at a 42.2% annual rate from $563 million (2006) to $2.3 billion (2010) -- yielding a wide 24% net margin. Its debt has risen -- but its cash is up faster. Specifically, its long term debt rose at a 23.6% annual rate from $1.8 billion (2006) to $4.2 billion (2010) while its cash climbed at a 34.1% annual rate from $1.3 billion (2006) to $4.2 billion (2010).
- Unpredictable earnings reports. Newmont has been able beat analyst’s expectations in three of its past five earnings reports but when it misses, it misses big.
- Out-earning its cost of capital but getting worse. Newmont is earning more than its cost of capital – but it’s getting worse. How so? It’s producing negative EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2011, Newmont's EVA momentum was -3%, based on six month annualized 2010 revenue of $8.8 billion, and EVA that deteriorated from six months annualized 2010's $1.2 billion to six months annualized 2011's $964 million, using a 7% weighted average cost of capital.
Despite the low valuation, I would be wary of investing in this mining stock.