(NEM) Newmont Mining Analyst Downgrades Shares to Neutral

Despite the excellent first-quarter 2011 results provided by Newmont Mining Corporation (NEM), we are downgrading our recommendation from Outperform to Neutral based on a number of challenges that the company faces at the Boddington mine.

Newmont reported adjusted net income of $513 million or $1.04 per share, up from last year’s $408 million or $0.83. The result eclipsed the Zacks Consensus Estimate of $0.96 per share. Total revenue was $2.5 billion, up 10% year over year, below the Zacks Consensus Estimate of $2.6 billion. Attributable gold and copper production was 1.3 million ounces and 57 million pounds, respectively, in the quarter at costs applicable to sales of $557 per ounce, and $1.11 per pound on a co-product basis.

Newmont also entered into a contract with Fronteer Gold Inc., under which the former will acquire all of the outstanding common shares of Fronteer. The transaction is expected to close in the second quarter of 2011 for approximately C$2.3 billion. We believe Fronteer provides the potential for significant development and operating synergies. Newmont delivers greater cash flow leverage than any other gold company in the world.

The company is ramping up production capacity at the Boddington project in Australia and expects average annual gold sales of about 1 million ounces for the first 5 years of operation. The company is also pursuing a number of projects, such as the Congo project in Peru, Akyem project in Ghana, Hope Bay in Canada and the Gold Quarry West Wall layback project in Nevada, which are currently expected to add up to 6 years to the mine life of gold quarries. Congo’s potential is estimated to be 15 million to 20 million gold ounces and 4 million to 6 million pounds of copper, and is believed to be one of the most compelling projects of the company. The Akyem project is expected to double its current annual production in Africa and has a potential for 8 million to 9 million ounces of gold. The current potential at Hope Bay is expected to be 9 million ounces of gold.

However, Newmont’s direct mining costs are increasing due to declining grades, increased royalties, equipment maintenance, waste removal, pit dewatering, and labor and fuel costs. The company’s non-mining costs are also increasing driven by legal expenses for environmental degradation lawsuits and government claims. Moreover, due to increases in gold prices and a higher Australian dollar rate, the company lifted its cash cost guidance range to $485– $500 per ounce of gold from the initial forecast of $460 to $480 per ounce.  The company also narrowed its production guidance to 5.3–5.4 million ounces from 5.3–5.5 million ounces.

The mining industry has been impacted by increased demand for critical resources, such as input commodities, drilling equipment, tires and skilled labor. These shortages have, at times, impacted the efficiency of the operations, and resulted in cost increases and delays in construction of projects; thereby impacting operating costs, capital expenditures and production and construction schedules.

In the gold industry, gold grades have plummeted approximately 27% since 2003. As operations mature, gold producers, including Newmont, are forced to extract ores with lower grades that are often accompanied by higher separation and extraction costs. Lower-than-expected ore grades are affecting gold production at the Boddington mine. For fiscal 2011, the company reiterated its previous expectation of attributable gold production of approximately 5.1 million to 5.3 million ounces, with attributable copper production of 190 to 220 million pounds. Costs applicable to sales are expected to be between $560 and $590 per ounce for gold.  Costs applicable to sales are expected to be between $1.25 and $1.50 per pound of copper.

However, Newmont faces stiff competition from AngloGold Ashanti Ltd. (AU), Barrick Gold Corporation (ABX) and Gold Fields Ltd. (GFI).

We maintain our Neutral recommendation on Newmont. Currently, it holds a Zacks #3 Rank (Hold).

BARRICK GOLD CP (ABX): Free Stock Analysis Report

ANGLOGOLD LTD (AU): Free Stock Analysis Report

GOLD FIELDS-ADR (GFI): Free Stock Analysis Report

NEWMONT MINING (NEM): Free Stock Analysis Report

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