Newmont Continues Disciplined Approach to Capital Allocation with Development of Suriname Gold Mine
Newmont Mining (NYSE:NEM) recently announced that it is going ahead with plans to develop the Merian gold mine in Suriname. The mine is expected to commence production in late 2016, pending receipt of the Right of Exploitation from the Government of Suriname. The total capital expenditure for the project is expected to be between $900 million to $1 billion. The Government of Suriname has the option to earn a 25% fully-funded equity ownership stake, including all project capital and operating expenses and an initial earn-in contribution. Newmont expects to fund its share of project costs through its existing cash balances and projected cash flows. [1]
The Merian mine is a low-cost asset and its fits in well with Newmont’s disciplined approach to capital allocation. Such an approach would give the company the flexibility to operate in a variety of gold pricing environments. The company management has previously stated that it intends to build a portfolio of longer life, low-cost assets. [2]
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The Merian Mine
The Merian mine has reserves totaling 4.2 million ounces of gold. To put this into context, Newmont’s attributable gold reserves stood at 88.4 million ounces at the end of December 31, 2013. [3] The mine is expected to produce 300,000-400,000 ounces of gold on an average over a life of 11 years. However, gold production is expected to average 400,000-500,000 ounces of gold over the first five years of operation. ((Newmont to Develop Merian Gold Mine in Suriname, Newmont Press Release)) To put this into context, Newmont’s gold production for 2014 is expected to be 4.7-5 million ounces.((Newmont’s Q2 2014 10-Q, SEC)) The estimated all-in sustaining costs (AISC) are expected to be $750-850 per ounce for the first five years and between $825-960 per ounce over the life of the mine. ((Newmont to Develop Merian Gold Mine in Suriname, Newmont Press Release))
The AISC metric 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 captures the total recurring costs to sustain current levels of production and helps investors gauge the company’s performance better.
Gold 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. 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)) 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. [4] An interest rate hike is likely to lead to a decline in the price of gold, as investors shift towards higher yielding assets.
Gold accounted for 92% of Newmont’s revenues in 2013. ((Newmont’s 2013 10-K, SEC)) With an uncertain pricing outlook for gold, at least in the near term, the company has adopted a disciplined approach to capital allocation by focusing on lower-cost and longer lasting assets.
Disciplined Capital Allocation
Newmont has made efforts to optimize its portfolio through the sale of non-core assets. The company has raised nearly $800 million through the sale of non-core assets over the past year or so. [5] The company intends to redeploy capital into projects that offer better returns. Asset sales and operational improvements have helped lower the company’s AISC metric, which stood 17% lower for Q2 2014 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. ((Newmont’s Q2 2014 Earnings Conference Call Transcript, Seeking Alpha))
The development of the Merian mine is consistent with Newmont’s disciplined approach to capital allocation. The average expected AISC for the Merian mine of $825-960 per ounce over the life of the mine, compares favorably with the company’s overall AISC for its gold mining operations, which stood at $1,063 per ounce in Q2 2014. ((Newmont’s Q2 2014 10-Q, SEC)) Thus, the Merian mine will help significantly boost Newmont’s gold production while at the same time lowering its average AISC figure. It looks like a step in the right direction for Newmont.
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Notes:
- Newmont to Develop Merian Gold Mine in Suriname, Newmont Press Release [↩]
- Newmont Mining’s Q1 2014 Earnings Transcript, Seeking Alpha [↩]
- Newmont’s 2013 10-K, SEC [↩]
- Janet Yellen Warns of Uncertain U.S. Economic Outlook, Financial Times [↩]
- Newmont Signs Agreement To Sell Jundee Underground Gold Mine In Australia, Newmont Mining News Release [↩]