Newmont Continues Sale Of Non-core Assets With Sale Of Interest In Penmont Joint Venture

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Newmont Mining (NYSE:NEM) has announced that it has entered into a binding purchase and sale agreement with Fresnillo plc to divest its 44% stake in the Penmont joint venture in Mexico for $477 million, including cash proceeds of $450 million. [1]

The divestment of its stake in the Penmont joint venture fits in well with Newmont’s disciplined approach to capital allocation, which prioritizes the deployment of capital in low-cost mining assets and the sale of non-core assets. 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 Penmont Joint Venture

Newmont holds a 44% interest in the gold properties of the joint venture- La Herradura, Soledad-Dipolos and Noche Buena, with Fresnillo holding the remaining 56% interest. [3] Gold production attributable to Newmont from these mines amounted to 183,000 ounces in 2013, out of a total attributable gold production of 5.065 million ounces for the company as a whole. [3] The mines accounted for 2.2 million ounces in attributable  proven and probable gold reserves for Newmont as on December 31, 2013, out of a total of 88.4 million ounces in attributable proven and probable gold reserves for the company as a whole. ((Newmont’s 2013 10-K, SEC)) The all-in sustaining costs (AISC) for the mines stood at $1,601 per ounce in 2013 and $1,151 per ounce in 2012. AISC for these mines shot up in 2013 due to the suspension of an explosives permit, which lowered production as well as pushed up costs. To put this into context, AISC for the company as a whole stood at 1,105 per ounce and $1,192 per ounce in 2013 and 2012 respectively. ((Newmont’s 2013 10-K, SEC)) The company

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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, as indicated by recently released manufacturing Purchasing Managers Index (PMI) data, the Fed is expected to raise interest rates some time in 2015. ((Upbeat Economic Reports Signal Sustained Improvement, Wall Street Journal)) However, the exact 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

The sale of Newmont’s interest in the the Penmont joint venture is consistent with the company’s disciplined approach to capital allocation. Newmont has made efforts to optimize its portfolio through the sale of non-core assets. The company has raised nearly $1.3 billion through non-core asset sales over the past year or so. [1] 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)) Focusing on its low-cost, core gold mines will lower the company’s average costs of production, as well as give it the flexibility to operate in a possible scenario of lower gold prices. With the Fed likely to raise interest rates in the near term, this looks like a step in the right direction for Newmont.

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Notes:
  1. Newmont Signs Agreement to Sell Stake in Penmont Joint Venture in Mexico, Newmont News Release [] []
  2. Newmont Mining’s Q1 2014 Earnings Transcript, Seeking Alpha []
  3. Newmont’s 2013 10-K, SEC [] []
  4. Janet Yellen Warns of Uncertain U.S. Economic Outlook, Financial Times []