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VIDEOThe Misleading Nature of Beating Estimates in the Mining Sector
There are so many issues that can affect quarterly results for miners that a judgment based on beat-the-number considerations is almost comical.
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Night of the Living Dead Fish: We've Seen This Movie Before
I'd like to take a look at Newmont Mining's (NEM) results, as well as touch on a topic I continue to find absolutely absurd. I was certain after the equity bubble was over that the game of beat-the-number promoted by Bubblevision and lapped up by Wall Street would end. To me, nothing is more moronic than looking at a company's earnings, "analyzing" whether it made a penny more or less than the average guess, and then buying or selling the stock. For one thing, such a simplistic approach leaves out an entire laundry list of actually relevant factors, such as valuation, competitive position, balance-sheet issues, deceleration or acceleration of growth rates, and so on.
While I was wrong in assuming that this silliness would stop once the stock market bubble collapsed, in a way that made me even more certain that after the real estate bubble burst we'd have it behind us. Yet, here Wall Street is, still playing that nonsensical game, and from what I hear, Bubblevision still hyperventilates over it.
There's no other industry that I know well (though I'm sure there are plenty of others I'm less familiar with) where it's crazier to judge a company's results by that yardstick than mining. There are so many issues and moving parts that can affect quarterly results for miners (but don't tell you anything about whether the near-term or long-term prospects of the business have changed), that a judgment based on beat-the-number considerations is almost comical. If a doctor behaved similarly, he or she would be sued for malpractice.
I make the point about mining because, after having been a director of Pan American Silver (PAAS) for about 14 years, I feel like I know the business pretty well. But, as I just noted, I'm sure the same point can be made about many other industries, from close cousins to mining (like energy extraction), to other enterprises that are quite different from the mining sector. In fact, as I've maintained for the last decade, companies that excel at beating the number probably are managing earnings, therefore their success at that game tells you nothing about what the businesses are actually worth. Witness the long run of wins "by a penny" of financial entities during the housing bubble, many of which went bankrupt (or nearly did) in 2008-2009.
Toccata and Fugue in B Sharp Miner
In any case, with that rant out of the way, Newmont's earnings were less than Wall Street analysts had predicted, so it "lost" at beat-the-number. Production was about in-line and the company upped the dividend by 50%. The reason it earned slightly less than had been forecast had to do with a few issues that weren't all that earth-shaking nor indicative of trouble (e.g., tax rate, provisional pricing adjustments, etc.). Cash flow was still on the order of $1.50 a share, so all in all, results there seemed to be about as expected. Yet, the business headlines focused on the "game."Making or beating an estimate in the mining business can be particularly misleading, since inventories (and ore on leach pads) can swing meaningfully due to very-short-term production and logistical issues. Newmont has over $1 billion in these two categories. Obviously, if less than 10% of that shipped, the company would have been deemed a winner. However, whether that extra inventory shipped or sat on the balance sheet has absolutely no bearing on the prospects for the business. (On a side note, Newmont indicated it was boosting capex considerably, as have other miners, which should lead to better results for the mining services industry, where signs of a strong profits revival are starting to spread.)
I, for one, will be elated when fools stop pretending that focusing on the results of the beat-the-number contest is investing. On the other hand, I suppose it does present opportunities to students of businesses, even if it is intellectually annoying.
(As this goes to press, Newmont Mining is up 0.60% and Pan American Silver is up 0.62%. Other gold and mining stocks include Freeport McMoRan Copper & Gold (FCX) and Stillwater Mining (SWC), up 1.04% and 1.80% respectively.)
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