Newmont Earnings Preview: Lower Gold, Copper Prices and Problems in Indonesia to Weigh on Results

by Trefis Team
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Newmont Mining (NYSE:NEM) will announce its second quarter results on July 29 and conduct a conference call with analysts the next day. We expect lower gold and copper prices and stalled exports at the company’s Indonesian operations, to negatively impact the company’s quarterly results year-over-year.

See our complete analysis for Newmont Mining

Gold and Copper Prices

Gold prices have fallen over the course of the last year, reacting to cues regarding tapering of the Federal Reserve’s Quantitative Easing (QE) program. Going forward, the Fed’s outlook on the U.S. economy is important as far as gold prices are concerned. With the economy strengthening, the Fed is expected to raise interest rates some time in 2015. However, the timing of an interest rate hike is contingent with the pace of economic and jobs growth in the U.S. [1] An interest rate hike is likely to lead to a decline in the price of gold, as investors shift towards higher yielding assets.

Gold prices averaged roughly $1,400 per ounce in Q2 2013. Prices have averaged roughly $1,300 per ounce in the second quarter this year. ((Gold Price Charts, Kitco)) Gold accounted for 92% of Newmont’s revenues in 2013. ((Newmont’s 2013 10-K, SEC)) Lower gold prices are expected to negatively impact the company’s revenues in the second quarter as compared to the corresponding period a year ago.

Copper prices tumbled earlier on in the year due to a slowdown in Chinese economic growth and fears over unwinding of financing deals using copper as collateral. China is the largest consumer of copper in the world, accounting for around 40% of the world consumption of copper. The prices of the metal are to a large extent influenced by Chinese demand for it.  According to data from China’s National Bureau of Statistics, growth in investment, factory output and retail sales slowed to multi-year lows in the first two months of the year.((China Premier Warns On Economic Slowdown As Data Fans Stimulus Talk, Reuters)) Further, the Chinese leadership has proposed structural reforms of the economy, shifting the emphasis from investment and export driven growth to services and consumption led growth. Such a transformation of the Chinese economy may negatively impact Chinese demand for copper in the long run. In addition to weak demand, the expansion in production by major copper mining companies has resulted in an oversupply situation. With a wave of new projects adding to global output, a supply glut will put pressure on prices. [2]

Copper is also used as collateral for financing deals by Chinese firms. Smelters, refiners and fabricators have been using copper inventory as collateral to obtain financing. It is estimated that up to a third of China’s copper imports may be tied up in financing deals. Thus, an unwinding of these deals could result in large quantities of copper being dumped in the market, which would add to the oversupply situation. The country’s first domestic bond default by Chaori Solar earlier on in the year, heightened fears of such an eventuality. This triggered a dramatic drop in copper prices. ((China Fears Trigger Dramatic Drop In Copper, Financial Times))

As a result of these factors, London Metal Exchange (LME) copper prices were lower in Q2 2014, as compared to the corresponding period a year ago. Spot prices averaged $6,800 per ton in Q2 2014, as compared to $7,100 per ton in Q2 2013. ((LME Copper Prices, LME)) Lower copper prices will impact Newmont’s revenues from its copper mining operations.

The Indonesian Situation

A law enacted in Indonesia in 2009, banned exports of unprocessed minerals from the country with effect from January 12, 2014. The intent behind this law was to provide a boost to the development of the Indonesian mineral processing industry and simultaneously increase the value of the country’s commodity exports. However, last minute changes to the law deferred the ban on exports to 2017. Exports of copper concentrate were permitted but under new rules. The government introduced new regulations in order to get an export permit and also imposed an export duty of 25%, which will rise progressively to 60% by 2016. Newmont contends that the export tax violates the terms of its contract with the Indonesian government and will also impact the economic viability of the project. The company halted its exports from Indonesia in January pending negotiations with the government over these regulatory changes. [3]

Newmont has a 48.5% effective economic interest in PT Newmont Nusa Tenggara (PTNNT), the entity that operates the Batu Hijau copper and gold mine in Indonesia. [4] In April 2014, PTNNT received approval from the Ministry of Trade as a ‘registered exporter’. However, it has not secured an export permit. With the negotiations between the company and the Indonesian government not yielding satisfactory results, Newmont has opted for arbitration to restart its export of copper concentrate. However, the company expects a permanent resolution to the situation through dialogue with the government, outside of arbitration. [5]

The Batu Hijau mine has been placed under care and maintenance. Newmont will continue selling copper concentrate from its storage facilities to PT Smelting in Gresik, Indonesia’s only copper smelter, through the remainder of 2014. This will allow for the shipment of 58,400 tons of concentrate between now and the end of the year. However, PT Smelting has capacity limitations and cannot purchase sufficient quantities of Newmont’s copper concentrates to allow for normal operations to continue at Batu Hijau. ((Arbitration Filed over Export Restrictions in Indonesia, Newmont Press Release))

Batu Hijau accounts for around 70% of Newmont’s estimated consolidated copper production of approximately 370 million pounds in 2014. [6] Batu Hijau produced 48 million pounds out of a total of 77 million pounds of copper produced by Newmont in the first quarter. [7] The suspension of operations at Batu Hijau could result in a substantial drop in copper production in 2014, depending on how long these operations remain suspended for. However, the impact on shipments will be lower than the loss in production, as the company is selling copper concentrate from its storage facilities. This would mitigate the potential loss in revenue from copper sales.

In terms of gold production, Batu Hijau accounts for less than 3% of Newmont’s estimated consolidated gold production of around 5.2 million ounces in 2014. [6] Thus, the suspension of operations at Batu Hijau will not affect Newmont’s gold production significantly.

Other Developments

Newmont continued with its strategy of divestment of non-core assets in the second quarter with the sale of the Jundee mine located in Western Australia. Newmont has raised $800 million from the sale of non-core assets over the period of last year or so. [8] This is part of the company’s strategy to operate competitively in a subdued gold pricing environment.

Expectations from Conference Call

It would be interesting to note whether the company management has identified any further opportunities for portfolio optimization through the sale of non-core assets. We would also like the company management to give an update on the issue of its suspended operations in Indonesia. More clarity on this front will throw some light on the road ahead for Newmont.

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Notes:
  1. Janet Yellen Warns of Uncertain U.S. Economic Outlook, Financial Times []
  2. Copper Miners Forecast Years Of Surplus, The Financial Times []
  3. Indonesian Government Relaxes Its Stance in Tax Dispute with Freeport and Newmont, Forbes []
  4. Newmont’s 2013 10-K, SEC []
  5. Arbitration Filed over Export Restrictions in Indonesia, Newmont Press Release []
  6. Newmont’s 2014 Production, CAS, AISC And Capital Outlook, Newmont Website [] []
  7. Newmont’s Q1 2014 10-Q, SEC []
  8. Newmont Signs Agreement to Sell Jundee Underground Mine in Australia, Newmont Press Release []
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  • commented 3 months ago
  • tags: ABX VALE FCX NEM RIO
  • There are several errors in the above article which adversely dipict the EPS outlook for the 2Q 2014 to be published this week. First of all, the average Gold price in 2Q of 2014 is approximately the same as in 2Q of 2013, rather than $100 lower. Secondly, the CoW (Contract of Work) that NEM has and signed in 1986 allowed NEM to declare the Force Majeure on Copper shipments in early June 2014, and so through the end of 2014, NEM need only pay its Indonesian workers 20% of their usual pay; this , I estimate, will add approximately $0.10 to the NEM EPS for 3Q and 4Q in 2014, and also about $0.05 EPS to its 2Q EPS. Moreover, the election of Mr. Joko Widodo to be President of Indonesia beginning in Oct 2014 is very favorable to NEM since Mr. Joko Widodo ran on a Platform of creating jobs for the working class people; he was a business man prior to becoming elected Governor of Jakarta in 2012, and so it is likely that soon after he takes Office in October 2014, he will roll back the harsh anti-business laws so that NEM can resume normal operations under the CoW. Furthermore, NEM is continuing to cut costs in their worldwide mining operations, and it is likely that another $50 Million cost reduction was achieved in 2Q 2014, thus adding another $0.10 EPS to its 2Q EPS to be published this week. Additionally, the NEM sale to Klondyke Mines of it Midas Mine & Refinery will create an additional profit of what I estimate to be approximately $0.20 per share. This all adds to the $0.23 EPS in 1Q 2014 to give my estimate of about $0.36 EPS for 2Q 2014 before the etraordinary gains of $0.20 from the sale of Midas Mines. July 24, 2014 at 11:22 a.m. PDT.