NEM: Costs Weigh on Gold Miner

Updated from Feb. 20 with earnings results

Gold and copper producer Newmont Mining (NEM - commentary - Cramer's Take) reported disastrous fourth-quarter and full-year 2007 results on Thursday. Earnings in the fourth quarter and in 2007 fell 338% and 229%, respectdively on the year, to a loss of 63 cents a share and $4.17, respectively.

Fourth-quarter revenue remained flat at $1.4 billion, while full-year 2007 revenue increased by 13% to $5.5 billion. The company that claims to be "the largest unhedged gold producer in the world" is hemmed in on all sides, with threats of ejection from its Indonesian operations, and potential problems with its Nevada mines, but insofar as revenue increased at all, it was due to the company's copper production, where the 82% increase in revenue outstripped the 53% increase in applicable costs.

It should be noted that the copper sales originated from copper mining in the troubled Batu Hijau Indonesian operations, where the company is facing increasing pressure to divest itself to a substantial extent of its 57% stake. The size of the loss was primarily determined by some technical but important accounting issues, which reduced earnings in total by $6.16/share.

The first important charge was a $1.1 billion writedown of exploration goodwill due to changes in reserve replacements, which reduced EPS by $2.48 a share. An additional $3.08 a share charge was due to the company's exiting merchant banking. One could consider these two charges as extraordinary, or instead consider this as evidence of company mismanagement.

Newmont got slammed with the double whammy of decreasing gold production coupled with increasing mining costs applicable to gold. Total gold ounces sold declined by 14% to 6.18 million ounces, and despite the 17% increase in the average price of gold over 2007 to $697/ounce, costs increased by 34%.

It should be noted that these trends do not affect all gold miners uniformly-they are specific to Newmont, since rival Barrick Gold (ABX - commentary - Cramer's Take) reported a 28% increase in fourth0quarter earnings. Without doing an analysis of the problem mine by mine (and the company has different issues in its mines, which span Nevada, Peru, Australia and Ghana), the problem originated from the necessity for the company to access more and more inferior ore reserves; the company release mentioned having to resort to waste stripping and mine sequencing in Nevada and Indonesia. Higher costs also affected profits in the Ahafo mines in Ghana due to greater haul distances and increased waste stripping. The Indonesian mines reported lower gold and copper recoveries. Overall Newmont's depreciation expense declined by 18%, but so did research and development, which dropped by 24%.

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At the time of publication, Vijayraghavan had no positions in the stocks mentioned.

Vasu Vijayraghavan was an academic finance professor at the University of Paris who has now turned to a new career as a financial consultant. As an academic, she wrote on corporate governance issues, especially in the European context, and she believes in a long-run and balance sheet approach to stock picking.

Currently, Vasu is working as a consultant for lawyers, doing business valuation. She is a Level II CFA candidate and enjoys writing long/short and earnings calls pieces for TheStreet.Com.

Vasu holds a Ph.D. from the University of Michigan and a B.A. from Harvard University.