It is well known that gold prices continued to rise in October this year and hit a record high above $2,800. A higher gold price is certainly good news for gold producers, helping boost their revenues and profits and eventually driving stock prices higher.
However, shares in Newmont Corporation (NEM), the world’s largest gold producer, fell 15% last month, according to S&P Global Market Intelligence. The reason may have something to do with the company’s latest earnings report released in October.
Newmont reported a sharp increase in revenue due to a surge in precious metals prices in the last quarter. As gold is accounting for more than 80% of the company’s revenue, the mining giant achieved $4.6 billion in quarterly revenue, up 85% from the same period last year. Sales growth has driven the company’s profits significantly, with operating profit quadrupling and free cash flow tripling year-to-date. It was arguably Newmont’s most profitable quarter in years.
This was an earnings report which beat Wall Street’s expectations on revenue and slightly missed earnings, and it shouldn’t have triggered a big stock pullback. However, what caught the attention of shareholders and the market in the earnings report was the gold giant’s latest progress on expenditure.
Newmont reports a “Cost applicable to sale” (CAS) for each mine on a consolidated basis in each quarterly earnings report, allowing investors to track the company’s cost per ounce of gold produced, while also providing an important data point for forecasting cash flow. Newmont’s CAS cost was $1,207 per ounce last quarter, up more than 30% year-to-date and much higher than most Wall Street analysts expected.
In the mining sector, mining companies are dealing with rising costs in several key categories such as labor and energy, and Newmont is no exception. That has partly offset the benefit of higher gold prices, which have driven the stock up nearly 30 percent over the past year through early October.
After the earnings report, Wall Street analysts sharply lowered their estimates for Newmont’s revenue and earnings next year.
For investors, Newmont’s stock now trades at 14.3 times forward earnings (P/E), down from nearly 19, indicating a relative lack of investor confidence. But Newmont’s troubles are not due to the company’s own reasons, which are more of the industry challenges. And for anyone looking to invest in gold, the stock’s latest valuation discount is worth keeping an eye on.
