Newmont Mining (NYSE:NEM) has released its 2013 operating results. The company’s production came in at the higher end of its guidance and the outlook for 2014 is quite encouraging according to the management. Newmont produced 5.1 million ounces of gold and 144 million pounds of copper in 2013. It had given a guidance range of 4.8-5.1 million ounces for gold and 135-145 million pounds for copper so actual production has met its expectations.
While Newmont has projected stable gold production, increased copper production, and continued capital and overhead reduction in 2014, we think that the real threats lie elsewhere. We expect a pessimistic price outlook for gold and copper in 2014 which will most probably offset Newmont’s gains from increased production and cost savings. Additionally, the company has reduced its price benchmark for measuring reserves and resources in accordance with lower price expectations going ahead. This will most certainly reduce its reported reserves. These are taken into account while valuing mining companies because they signify the extent to which the company can grow in the future. We expect the company to report significant asset impairments as well due to revised price expectations.
We have a Trefis price estimate for Newmont Mining of $24, which we will revise after earnings results are declared next month.
Production And Prices
Newmont reported fourth quarter attributable gold and copper production of 1.448 million ounces and 38 million pounds respectively. The production of gold was higher compared to the previous year’s comparable period figure of 1.251 million ounces, and that of copper was higher than the Q4 2012 figure of 35 million pounds. Attributable gold and copper sales were 1.475 million ounces and 45 million pounds respectively. These compare to the figures of 1.231 million ounces of gold and 42 million pounds of copper last year. 
For the whole year, gold production stood at 5.065 million ounces and copper production stood at 144 million pounds. These figures are higher than the reported 2012 production figures of 4.977 ounces of gold and 143 million pounds of copper. The production of gold was higher this year due to strong performance at Tanami, Waihi and Kalgoorlie mines as well as commissioning of the Akyem mine in Ghana. The production of copper benefited from commissioning of the Phoenix Copper Leach operations.
The company reported average realized prices of approximately $1,393 per ounce of gold and $2.96 per pound of copper for 2013. This represents a steep decline from average realized prices of $1,662 per ounce of gold and $3.43 per pound of copper in 2012. The price of gold declined largely due to quantitative easing (QE) taper pronouncements by the Federal Reserve Bank while the price of copper suffered because of an economic slowdown in China. 
In 2014, Newmont expects consolidated gold and copper production to be approximately 5.0 to 5.3 million ounces and 160 to 175 thousand tonnes, respectively. It also expects to reduce overhead expenses by 20%.
According to the company, the Phase 6 stripping campaign at its Batu Hijau mine will be completed in the fourth quarter of 2014 and production of copper will subsequently increase due to higher grades of ore. However, there is a caveat. The new export regulations of the Indonesian government may interfere with Newmont’s operating plans. The government has imposed a new export duty of 25% on copper concentrate which, according to Newmont, is a violation of the bilateral agreement it signed with the government. Moreover, this duty will increase progressively to 60% by end of 2016. Newmont is considering taking legal action on this front so we think that it may choose to suspend operations temporarily pending resolution of dispute. If the company thinks that it cannot export at a profit, there would be no point producing copper and storing the inventory at an additional cost. 
The company has reduced its gold price assumption to $1,300 per ounce from $1,400 per ounce for asset impairment testing and reserve calculations. As a result, there could be significant non-cash impairments when it reports its fourth quarter results next month which will impact profits.Notes:
- Newmont Achieves 2013 Production Target; Provides 2014 Outlook, Newmont Press Release [↩]
- Newmont 2012 10-K, SEC [↩]
- Newmont May Consider Legal Action Against New Indonesian Export Duty, Trefis [↩]