IntroductionNewmont Corporation (NYSE: NEM) reported third-quarter earnings on October 23, 2024. This article provides an update on my Gurufocus article dated July 8, 2024, in which I analyzed the second quarter of 2024.
In the third quarter of 2024, Newmont's main source of revenue was predominantly gold, which represented 85.7% of the total revenue, up from 82.3% in the second quarter of 2024. The remaining revenue came from the sale of by-products, including copper, silver, lead, and zinc.
Silver and copper are converted into gold equivalent ounces, while lead and zinc are sold directly and applied against cash costs, significantly reducing expenses. In 3Q24, GEO production represented 20.5% of the total production of gold equivalent. This explains the difference between the all-in-sustaining costs (AISC) for gold ($1,611 per ounce in 3Q24) and the AISC for gold equivalents ($1,426 per ounce in 3Q24).
Metal production other than gold accounted for approximately 14.3% of the total revenue in 3Q24, which shows a substantial increase from last year following the acquisition of Newcrest on November 6, 2023. Below is the revenue breakdown for 3Q24 by metal.
What caused the significant drop in stock value on the day the company announced its third-quarter results?Earnings results fell short of expectations, particularly given the significant increase in gold price in 2024, which is currently above $2,700 per ounce. On January 1, 2024, gold was priced at $2,064 per ounce.
As a long-time shareholder, I was very disappointed with the results. The poor production guidance is projected to be 9% below previous estimates. Additionally, costs are expected to increase by 16% in 2025. In the conference call, the company said:
Looking ahead to 2025, we expect gold production next year from Lihir will be largely consistent with this year and around 250,000 ounces lower than our initial guidance for 2025 that we provided back in February.However, the company expects AISC to drop from $1,611 to $1,475 per ounce in 4Q24.
When the results were released, the stock price experienced a significant decline. It dropped from nearly $58 per share to just above $49 and fell further throughout the week to close at $45.28 on Friday.
As the chart above indicates, the market lost confidence in the company's ability to restore healthy operational growth.
UBS downgraded Newmont from Buy to Neutral and adjusted the price target to $54 from its previous $67 per share.
Despite this painful setback, we cannot overlook that Newmont is one of the most reliable gold producers in the world. Although it can be challenging to maintain a clear perspective when your investment is declining, it's important to focus on the fundamentals rather than relying too heavily on analysts and their often biased opinions.The firm highlighted that the disappointing third-quarter outcomes and the subsequent implications for the medium term were instrumental in the decision to downgrade the stock and lower the price target.
I recommend carefully analyzing the numbers before considering selling this stock at a loss; doing so would be a significant mistake. I will not sell this company, even if I must endure a paper loss for several months or longer. No one can predict stock prices, and patience is of the essence. They will fluctuate endlesslythat's what stocks do because they depend on "sentiment," "perception, estimate, expectation, or a dozen other subjective criteria.
To illustrate my point, let's analyze the valuation of Trump Media & Technology Group Corp. (DJT), which is over $6 billion despite having almost no revenue and significant income losses. Compared to NEM, how can we justify such a valuation?
To avoid being victims of this mind game, we must adopt a strong strategy that provides a steady income while maintaining our long-term position and paying us regular dividends. Of course, this strategy has tax implications, but they are secondary.
This strategy is known as LIFO trading, which enables you to sell your most recent purchases for a profit of between 3% and 5% or more. You can hold onto your older, higher-cost purchases until the stock price rises to a level that allows you to sell them at a profit. The short-term transactions rely strongly on technical analysis.
A thorough look at the fundamentals and production history.
1: Fundamentals
Newmont reported earnings from continuing operations of $0.80 per share for the third quarter of 2024. It is a significant increase from $0.20 per diluted share in the same quarter last year.
The company's revenues for the third quarter were $4.605 billion, representing an approximately 85% year-over-year increase. This growth was largely attributed to the acquisition of Newcrest.
In the third quarter, average realized gold prices reached $2,518 per ounce, along with increased sales volumes, leading to improved overall performance. However, high cash costs offset these advantages. The higher costs were primarily attributed to the Lihir, Cerro Negro, and Akyem mines.
The company indicated it has a $3 billion buyback program but kept the dividend at $0.25 per quarter.
Despite some setbacks and disappointing production forecasts, the company reported achieving a $500 million synergy run rate and is progressing towards its divestiture plan, with two divestitures already announced. In the conference call:
Our non-core divestment program has advanced meaningfully, with the two recently announced transactions expected to deliver up to $1.5 billion in combined gross proceeds.This quarter, the free cash flow reached $771 million, almost double the amount earned in the same quarter last year. Cash flow from operations totaled $1,648 million, while capital expenditures (CapEx) were $877 million.
The chart below illustrates that the company has made significant progress in managing its debt. However, I would have preferred if the company had used its cash to pay down debt instead of buying back shares. Reducing debt should be a first priority.
Long-term debt is now $8,550 million, down from $8,874 million in 4Q23. Cash, cash equivalents, and marketable securities totaled $3,059 million.
2: Gold Production
Newmont's attributable gold production for the third quarter reached 1,668,000 ounces, representing a 3.8% increase from the 1,607,000 ounces reported in the previous quarter. A reminder: The year-over-year comparison is not meaningful due to the acquisition of Newcrest.
The gold equivalent production in 3Q24 was 430,000 GEOs, for 2,098,000 GEOs total.
This production increase was due to higher production at Cerro Negro, increased throughput at Brucejack, improved mill utilization at Ahafo, and enhanced output at Yanacocha. However, the results were slightly below analysts' expectations.
All-in-sustaining costs increased this quarter to $1,611 per GEO, up from $1,562 in 2Q24. The company anticipates an 8% decrease in 4Q24. However, historically, AISC has risen significantly since 2022, and the trend is quite worrisome.
Technical Analysis
Note: The chart has been adjusted for dividends.
Newmont forms an ascending channel pattern, with resistance at $49.20 and support at $42.85. The relative strength index (RSI) is now 25, considered a strong buy signal.
As I mentioned in my earlier article on NEM, an ascending channel is generally perceived as bullish in the short term. However, this pattern often results in a breakdown, which has occurred since the 3Q24 release. The stock is now searching for new support, around $42.85. However, depending on the gold price, NEM could drop below $40 if the gold price starts to decline again from its all-time highs.
It is safe to consider buying back NEM at this level and taking short-term profits on any rally above $49. Please look at my chart above for more information.Taking partial short-term LIFO profit is crucial. As I explained earlier, the short-term trading strategy is to trade LIFO for approximately 40% of your position while holding a core long-term amount for a potential significant recovery. However, in the meantime, you will be able to enjoy a dividend yield of 2.2%.
I suggest selling between $48 and $50, with possible higher resistance at $52.25. Buying now below $45 to potentially $41 seems the right choice.
Warning: To remain relevant, the TA chart must be updated regularly.
This content was originally published on Gurufocus.com
