Gold Miners Risk Missing Boom Amid Cost Drag

Gold prices are at historical highs. However, the disappointing performance of one of the world's largest gold mining companies suggests that these companies may struggle to profit from the surging demand.

Newmont Corp., headquartered in Denver, saw its stock price plummet by 15%, marking the largest single-day drop in over 25 years, after the company reported third-quarter earnings, revenue, and profit margins that fell short of analyst expectations, dragged down by rising costs for labor, diesel, and other operational expenses. Its main competitors, Barrick Gold Corp. and Agnico Eagle Mines Ltd., also experienced a decline in their stock prices.

Analysts had high hopes for the industry, with gold being one of the best-performing commodities this year, soaring over 30% due to interest rate cuts and geopolitical turmoil. However, Newmont's results indicate that large gold producers are still grappling with inflationary pressures, particularly in terms of labor costs, which have persisted longer than anticipated.

Josh Wolfson, a mining analyst at Royal Bank of Canada, stated, "Assuming Newmont's conclusions are accurate, this could be a risk factor for the industry."

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Newmont's earnings per share were 80 cents, significantly below the average expectation of 89 cents from analysts surveyed by Bloomberg. Revenue of $4.61 billion also fell short of expectations, and the gross margin was below 50%.

The company stated that its expenditures for mining gold in Australia, Canada, Peru, and Papua New Guinea were higher than the previous quarter. Capital expenditures increased by 10% due to expansion projects in Australia and Argentina, with the company's highest spending stemming from the main assets acquired last year in the $15 billion purchase of Newcrest Mining Ltd.

Some of these cost issues are specific to the company and do not necessarily represent trends across the entire industry. Newmont is undertaking costly maintenance work at its Lihir mine in Papua New Guinea—a notoriously complex operation in a remote area. Additionally, following the death of two workers in April, the company suspended operations at its Cerro Negro mine in Argentina and spent more money to restart the mine.

However, the company's rising labor costs may signal trouble for the entire industry.

"We are seeing an increase in labor costs," CEO Tom Palmer told analysts in a conference call on Thursday.

He said, "Whether it's maintenance for stoppages or maintenance to supplement labor, the cost of operating camps, the cost of transporting personnel to and from camps, we are seeing some escalations that were beyond what we anticipated at the beginning of this year."Historically, mining company stocks have been considered to offer higher returns than holding metals, partly because they have more investment options and shareholder dividends. However, this relationship has broken down over the past 15 years, as massive expansion has brought producers huge debts and angry shareholders.

Newmont's earnings also foreshadow the prospects for Canadian Barrick, which co-owns a large mining complex with Newmont in Nevada. Compared with the previous quarter, gold production at Nevada's gold mines has declined.

Despite investor disappointment, gold miners still benefit from the gold boom: Newmont reported its highest quarterly profit in five years, reaching $922 million. Analysts predict that Newmont's net profit for this year will reach $3.2 billion, setting a new record in the company's history.

Even after the sharp drop on Thursday, Newmont's stock price has still risen by 19% this year.

Barrick, Agnico, and other major producers such as AngloGold Ashanti Plc and Gold Fields Ltd. are also expected to reap substantial returns before the end of this year.

"The market expectations are too high," said Canaccord Genuity mining analyst Carey MacRury, who recommends investors to buy the company's stock. "There is no doubt that it is negative, but I don't think it is as negative as the market tells us today."