How do Newmont’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 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’ profit forecasts, which anticipate Newmont 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 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.
Action to Take –>
— 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
This article originally appeared on ProfitableTrading.com:
Drop in Gold Prices May be Final Straw for This Struggling Miner
P.S. In a recent issue of his Scarcity & Real Wealth advisory, StreetAuthority expert Dave Forest told his subscribers about a gold miner that he thinks has fallen too far compared with the price of gold — especially when you consider that it’s one of the top low-cost producers in the sector. Out of fairness to subscribers, we can’t reveal the name of the company here — but you can click here to get all the details.
– David Sterman
Warren Buffett’s Top 5 Stocks
Buffett’s firm, Berkshire Hathaway, holds dozens of stocks. But these five make up 75% of its portfolio… worth $65 billion. Click here to get Buffett’s top 5 stocks plus his 16 latest buys, FREE
