Newmont Mining Corp (NEM): Drop in Gold Prices May be Final Straw for This Struggling Miner

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For example, Merrill Lynch anticipates that Newmont Mining Corp (NYSE:NEM) will generate $400 million in free cash flow in 2014 and nearly $600 million in free cash flow by 2015. Yet those forecasts assume that gold prices will average $1,520 an ounce in 2014 and $1,570 in 2015. In other words, they are pretty worthless right now.

How do Newmont Mining Corp (NYSE:NEM)’s mining costs relate to gold prices? The recent asset write-downs and various charges have made the analysis a bit murky, but analysts at UBS AG (USA) (NYSE:UBS) have made a best guess: “All-in cash costs remain at $1,100-$1,200/oz excluding the write-downs but have been revised upwards to $1,200-$1,300/oz inclusive of these charges.”

Analysts at Citigroup Inc. (NYSE:C) have a slightly different take: “Excluding stockpile write downs, all-in sustaining cash cost guidance for the year remains unchanged at $1,100-$1,200/oz.” In other words, gold prices at $1,000 an ounce would be problematic for a company with such a high debt load.

UBS AG (USA) (NYSE:UBS)’ profit forecasts, which anticipate Newmont Mining Corp (NYSE:NEM) earning roughly $1.50 a share this year, were made when gold traded for $1,470 per ounce. Translation: Look for analysts to reduce their estimates when Q3 results roll around and perhaps sharply reduce them if gold slips below $1,200 an ounce.

Newmont’s high debt load, still considerable capital spending needs and soon-to-be falling profit forecasts put the company’s shares on a collision course.

In the near term, shares are vulnerable to downward profit forecast revisions when the company releases Q3 results, scheduled for Oct. 28, reflecting the reality of $1,300 gold.

In the intermediate term, if gold tumbles to $1,050 an ounce in 2014, as Goldman Sachs Group, Inc. (NYSE:GS) anticipates, then shares are poised for an even deeper slump. That makes NEM a stock to avoid at all costs for investors, and for short sellers, an increasingly appealing target.

Over the next year or two, if gold prices remain below $1,000 an ounce, then Newmont will likely need to pursue asset sales at distressed prices to address its debt obligations.

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— Short NEM at prices down to $24
— Set stop-loss at $31
— Set initial price target at $20 for a potential 17% gain in four months

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