Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

A Gold Miner’s Revenues Increase

Newmont Mining (NYSE: NEM) reported something very unusual for the modern gold mining industry – a slight revenue increase for first quarter 2016.

Newmont ended 2015 with TTM revenues of $7.729 billion in December, and entered second quarter 2016 with revenues of $7.789 billion in March. The revenue increase was small; around $60 million, but it was there.

Investors will be wondering if this marks the start of a recovery at Newmont; after the abandonment of its $5 billion Conga project in Peru. Development efforts at the Conga ended in April because of intense opposition from local residents, reported. The Conga was supposed to replace another Peruvian mine, Yanacocha which is running out of gold.

Is Newmont Making Money?

The answer is; probably not, because some of Newmont’s other numbers are terrible. The company reported a net income of $89 million on March 31, 2016, despite a profit margin of 2.56%, for example. It also offered an earnings-per-share number of .1817.


There were some good numbers at Newmont including; a free cash flow of $225 million, $2.042 billion in cash from operations and $2.488 billion in cash and short-term investments. Those figures indicate that the company has some problems, because the amount of cash at Newmont is shrinking

Newmont’s cash and short-term investments fell by $853 million between June 2015 and March 2016. Newmont had $3.341 billion in the bank in June 2015; and $2.488 billion in March 2016.

During the same period cash from operations increased, rising from $1.946 billion in June 2015 to $2.042 billion in March 2016. It looks as if Newmont’s cash flow is increasing but its float is falling. My guess is that the float is dropping because of all the money spent on Conga – a mine that will produce no ore.

Why is Newmont’s Revenue Increasing?

The earnings report does raise an interesting question: why are Newmont’s revenues increasing? That is an interesting question, because there are some signs the industry is recovering from the drops in metal prices over the past few years.

At least one other miner; Goldcorp: (NYSE: GG), saw its revenues grow by $727 million between March 2015 and March 2016. Goldcorp reported a TTM-revenue of $3.575 billion; that grew to $4.302 billion a year later. During the same period Newmont saw its revenue increase from $7.5 billion in 2015 to $7.789 billion a year later.

The most likely explanation for this is the decline in fuel prices; which reduces operating expenses for miners. This will not make up for the lost revenue from the decline in gold and prices, but it can keep mining profitable.

That makes miners like Newmont a partial value investment. Newmont is currently very cheap; it was trading at $35.84 a share on June 16, 2016. Yet it did not pay that well, ycharts reported that investors received a .28% dividend yield and a .8% return on equity from Newmont on June 16, 2016.


Stay Away from Gold Miners

My advice would be to stay away from gold miners until the industry stabilizes. The industry will not be able to stabilize until fairly gold and fuel prices are achieved.

Interestingly enough, I think fuel prices have stabilized, and gold prices will stabilize within the next few months. My prediction is that gold will stabilize at around $1,000 an ounce; and stay there for the next few years. During the same period oil will hover at around $50 a barrel.

Such stability should allow gold miners to reach what we can call a profitable equilibrium. Once it is achieved gold mining companies might become solid value investments that pay a good dividend. Until then stay away from gold, far, away with if you don’t want to lose money.