Lower Gold Prices And Shipments Weigh On Newmont’s Q2 Results

July 31st, 2014 by Trefis Team
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Newmont Mining (NYSE:NEM) announced its second quarter results on July 29 and conducted a conference call with analysts on July 30. Lower gold prices and shipment volumes adversely affected the company’s results. The company’s suspended exports from Indonesia negatively impacted its copper shipments.

As a result of lower gold prices and lower gold and copper shipments, Newmont reported second quarter revenues of $1.765 billion, around 12.5% lower year-over-year. The company reported net income from continuing operations of $182 million for the second quarter, up from a loss of $2.133 billion in the corresponding period last year. The company’s results in Q2 2013 were negatively impacted by impairment charges totaling $2.261 billion due to a sharp fall in gold and copper prices. The company’s net income figure for the second quarter reflects the absence of major impairment charges and a tax benefit related to a favorable tax settlement. [1]

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Gold Prices

Average realized gold price for the second quarter stood at $1,283 per ounce, down from $1,386 per ounce in the corresponding period last year. [2] 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 upon the pace of economic and jobs growth in the U.S. [3] An interest rate hike is likely to lead to a decline in the price of gold, as investors shift towards higher yielding assets.

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Segment-wise Performance

Gold sales fell from $1.845 billion in Q2 2013 to $1.629 billion in Q2 2014. Lower realized gold prices accounted for $131 million of this decrease, with lower shipments accounting for $85 million of the decrease. ((Newmont’s Q2 2014 10-Q, SEC))

Shipments were lower at the North American mining operations due to lower production at the Phoenix, Twin Creeks and La Herradura mines, offset by higher production at the Carlin mine. Production fell from 437,000 ounces in Q2 2013 to 401,ooo ounces in Q2 2014 for the whole segment. Production fell 19% at each of the Phoenix and Twin Creeks mines due to mining of lower grade ores. In addition, the sale of the Midas mine also contributed to lower production at Twin Creeks. Production fell 15% at La Herradura due to suspension of its explosives permit. Production at the Carlin mine rose 3% due to mining of higher grade ores and higher recoveries. ((Newmont’s Q2 2014 10-Q, SEC))

Production at the South American mines fell from 167,000 ounces in Q2 2013 to 106,000 ounces in Q2 2014, primarily as a result of a 35% decrease in production at the Yanacocha mine, which makes up the bulk of production volumes for the segment, due to processing of lower grade stockpiled ore. ((Newmont’s Q2 2014 10-Q, SEC))

Production in the Australia/New Zealand region rose to 468,000 ounces in the second quarter, up from 418,000 ounces in the corresponding period last year. This was primarily as a result of 53% higher production at the Tanami mine due to mining of higher grade ores and higher mining rates as well as a 64% increase at the Waihi mine as a result of higher ore tons mined. ((Newmont’s Q2 2014 10-Q, SEC))

Production rose to 238,000 ounces in Q2 2014 from 139,000 ounces in Q2 2013 at the African operations, mainly due to the commencement of commercial production at the Akyem mine in the fourth quarter of 2013. ((Newmont’s Q2 2014 10-Q, SEC))

Copper sales fell to $136 million in Q2 2014 from $173 million in the corresponding period last year. This was mainly because of a drop in sales at the Batu Hijau copper mining operations in Indonesia, where the suspension of the company’s exports resulted in a fall in sales from $99 million in Q2 2013 to $59 million in Q2 2014. ((Newmont’s Q2 2014 10-Q, SEC))

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. [4]

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. [5] 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 suspended production at its Indonesian operations in June. 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. 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. Newmont later opted for arbitration to restart its export of copper concentrate.  ((Arbitration Filed over Export Restrictions in Indonesia, Newmont Press Release))

The company management did not give a firm timeline for the  resumption of its exports from Indonesia in its earnings conference call.

Costs

The company’s efforts at cost reduction and productivity improvement  showed results with the All-in Sustaining Cost (AISC) metric for gold production 17% lower for the second quarter as compared to the corresponding period a year ago. However, only 10% reduction in AISC is attributable to operational improvements, with the remaining 7% due to absence of significant inventory write-downs. The AISC metric captures all of the expenditures incurred to discover, develop and sustain production. AISC includes costs applicable to sales, remediation costs, general and administrative costs, advanced projects and exploration expenses, treatment and refining costs, sustaining capital expenditure and other miscellaneous expenses. This metric helps investors gauge the company’s performance better. [6]

The company generated $359 million in savings on its gold all-in sustaining costs in the second quarter. Year-to-date savings in all-in sustaining costs stood at $454 million, with about half of the savings attributable to lower cost applicable to sales. Improved efficiency, specifically through better equipment utilization, mine planning and mill recovery, was mainly responsible for this. ((Newmont’s Q2 2014 Earnings Conference Call Transcript, Seeking Alpha))

Other Developments and Outlook

The company announced that it will develop the Merian gold mine in Suriname, with commercial production expected in 2016. The mine is expected to produce 300,000-400,000 ounces of gold annually. With an expected AISC of $750-$850 per ounce, it is a fairly low cost asset. AISC for Newmont’s overall gold mining operations stood at $1,063 per ounce in Q2 2014. ((Newmont’s Q2 2014 Earnings Presentation, Newmont Website))

With the Akyem mine commencing production in Q4 2013 and an increase in gold production from Australia/ New Zealand, the company has raised its attributable gold production forecast for 2014 by 2% to 4.7-5 million ounces. In view of the suspended Indonesian operations, the company has revised down its copper production outlook for 2014 to 55,000-80,000 tons of copper from its earlier guidance of 95,000-110,000 tons. [2]

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Notes:
  1. Newmont’s Q2 2014 10-Q, SEC [↩]
  2. Newmont’s Q2 2014 Earnings Presentation, Newmont Website [↩] [↩]
  3. Janet Yellen Warns of Uncertain U.S. Economic Outlook, Financial Times [↩]
  4. Indonesian Government Relaxes Its Stance in Tax Dispute with Freeport and Newmont, Forbes [↩]
  5. Newmont’s 2013 10-K, SEC [↩]
  6. Newmont’s Q2 2014 Earnings Conference Call Transcript, Seeking Alpha [↩]