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Investment Overview for Newmont Mining (NYSE:NEM)
WHAT HAS CHANGED
Gold prices have been declining on average over the past few years. This trend continued over the course of the last year, which prompted Newmont Mining to rationalize its portfolio of mines in response to the subdued pricing environment.
- Declining gold prices
- Gold prices have fallen over the course of the last year, reacting to cues pertaining to the tapering of the Federal Reserve's Quantitative Easing (QE) program and expectations of an interest rate hike by the Fed. Gold as an investment is often viewed as a hedge against inflation and economic weakness. Strengthening U.S. economic growth stoked fears of an interest rate hike by the Fed, which reduced the investment demand for gold and led to a fall in prices of the metal. With the Fed finally raising interest rates in its December meeting, gold prices have been subdued all through the course of 2015.
- London PM Fix gold prices averaged $1,411 per ounce in 2013, falling to $1,266 per ounce in 2014 and have averaged well below $1,200 per ounce in 2015.
- Divestment of non-core assets and rationalization of operating costs
- Newmont Mining has rationalized its business in response to the subdued gold pricing environment. It has divested several high cost gold mines over the course of 2014, as well as tried to reduce its operating costs. The company has divested $1.7 billion worth of non-core assets since mid-2013. The impact of the sale of the company's high-cost mines is reflected in Newmont's all-in sustaining costs (AISC) metric, which is a measure of the overall costs required to sustain a company's current mining operations. The AISC for Newmont's gold mining operations fell from $1,113 per ounce in 2013, to $1,002 per ounce in 2014, and further to $864 per ounce in the first nine months of 2015.
Below are key drivers of Newmont's value that present opportunities for upside or downside to the Trefis price estimate for the company's stock:
- Newmont's Asia Pacific Gold Shipments: Newmont's Asia Pacific Gold Shipments have steadily increased, as the decline in production from its Indonesia operation was offset by the start of production at its Boddington mines in Australia. However, the start of Phase 6 mining operations in Indonesia may significantly boost volumes. We currently forecast shipments to increase by 32% in 2015 and by 2% annually over the rest of our forecast. However, production could exceed the base case expectations at Batu Hijau, Indonesia. If shipments increase by 4-5% annually, it would represent a 6% upside to the Trefis price estimate.
North American Mines
- Newmont's North American Gold EBITDA Margin: Newmont's margins from its North American operations increased from 16% in 2007, to 47% in 2012, as the sharp rise in gold prices offset a significantly higher cost of sales. Margins for the division fell to 36% and 28%, in 2013 and 2014, respectively, due to a fall in prices. We expect margins to remain under pressure in 2015 due to a fall in gold prices. However, margins are expected to rebound in 2016, due to a rise in production volumes. However, if production doesn't ramp up as expected, and the improvement in margins is only around half of what we expect, there would be a downside of nearly 10% to the Trefis price estimate.
Newmont Mining Corporation is a gold and copper producer with operations in the United States, Australia, Peru, Indonesia, Ghana, Canada, New Zealand, and Mexico. The company has nearly 82 million ounces in proven and probable gold reserves.
The company also produces copper, primarily through its Batu Hijau development in Indonesia, and Boddington project in Australia.
Gold mining drives value
Gold mining is the most important division for Newmont Mining in terms of revenues and profits. In 2014, the company's consolidated gold production stood at 5.23 million ounces. Gold generally accounts for over 80% of the company's consolidated sales. Asia Pacific Mines is the company's most valuable segment, according to our estimates.
Rising demand for gold from emerging economies
Demand for gold is expected to be quite robust from major emerging economies. Rapidly growing middle class populations and rising incomes in these countries, particularly China and India -- the world's largest gold consumers -- are expected to result in a sustained jewelry and investment demand for gold. The Chinese middle class population is expected to grow by over 60% or 200 million, to 500 million in six years time. Private sector demand for gold in China is expected to rise from 1,132 tons in 2014 to at least 1,350 tons by 2017.
Weak global demand for copper
China is the largest consumer of copper in the world, accounting for nearly 40% of the total world consumption of copper. China's GDP growth is expected to slow to 6.8% and 6.3%, in 2015 and 2016, respectively, from 7.4% in 2014. Slower economic growth in China has led to a moderation in demand for copper. Further, the proposed structural transformation of the Chinese economy from an investment and export led growth model, to a consumption led growth model, may negatively impact Chinese demand for copper in the long run. Weak Chinese demand for copper will put pressure on copper prices.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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