On May 28, we downgraded gold mining giant Newmont Mining Corporation ( NEM ) to Underperform following its lackluster first-quarter 2013 results. Our view takes into account the weak gold price environment, higher costs and geopolitical risks.
Why the Downgrade?
Both revenues and profit for the first quarter, reported on Apr 29, declined by double digits, hurt by lower grade and shipping delays. Adjusted earnings and sales missed the Zacks Consensus Estimates. Attributable gold production fell 11% in the quarter. Weaker gold and copper pricing affected the results.
Earnings estimates for Newmont are on the downswing following the release of the first quarter results. The Zacks Consensus Estimate for 2013 has gone down roughly 19% to $2.67 per share. On a similar note, the Zacks Consensus Estimate for 2014 has also declined around 23% to $3.33. With Zacks Consensus Estimates for both 2013 and 2014 going down, Newmont now has a Zacks Rank #5 (Strong Sell).
Cause for Concern
Newmont may continue to face headwinds due to increasing mining and non-mining costs. Cost applicable to sales went up 22% year over year to $758 per ounce of gold in the first quarter. In addition, copper costs climbed 11% in the quarter.
Moreover, lower ore grades are affecting production across a number of operations. Newmont's production remains challenged at the Batu Hijau mine in Indonesia as certain geo-technical issues are impacting weight stripping capability. Production from the mine tumbled 36% year over year in the first quarter.
The recent downturn in gold price represents another concern. Gold price fell sharply to below $1,400 per ounces recently to hit a four-week low level. A rapidly strengthening dollar (versus euro) is weighing on the price of the yellow metal.
Mining Stocks That Warrant a Look
While we prefer to stay away from Newmont, other companies in the mining industry having favorable Zacks Rank are Lake Shore Gold Corp. ( LSG ), Xstrata plc ( XSRAY ) and Impala Platinum Holdings Ltd. ( IMPUY ). All of them retain a Zacks Rank #2 (Buy).