Newmont Earnings Preview: Lower Gold Prices To Weigh On Results

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Newmont Mining

Newmont Mining (NYSE:NEM) will announce its third quarter results on Thursday, October 30 and conduct a conference call with analysts the next day. We expect lower gold prices in the third quarter, as compared to the corresponding period last year, to negatively affect Newmont’s results.

Newmont announced the resumption of its mineral exports from Indonesia towards the end of September, ending a near eight month suspension of its exports from the country. ((PTNNT to Resume Operations and Copper Concentrate Exports, Newmont News Release)) The company had halted exports pending negotiations with the Indonesian government over new regulations governing mineral exports from the country that came into effect in January. The resumption of exports, albeit under new regulations, will positively impact the company’s flagging copper shipment volumes from its Indonesian mining operations starting from the fourth quarter. However, the company will once again report lower year-over-year copper shipments in Q3 as a result of the export restrictions.

The company has divested a number of high-cost, non-core assets since the middle of last year. This will help lower the company’s cost structure and better position it to operate in subdued gold pricing environments. Newmont continued with its startegy of divestment of non-core assets with the announcement of the sale of its interest in the Penmont joint venture in Q3. [1]

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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. 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. [2] An interest rate hike is likely to lead to a decline in the price of gold, as investors shift towards higher yielding assets.

London PM Fix gold spot prices averaged roughly $1,330 per ounce in Q3 2013. Prices have averaged roughly $1,280 per ounce in the third 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 results in the third quarter, as compared to the corresponding period a year ago.

Copper Production and Shipments

The company is expected to report a sharp decline in copper production in the third quarter. The company’s copper mining operations at Batu Hijau in Indonesia were expected to account for around 70% of Newmont’s estimated consolidated copper production of 160,000-175,000 tons for 2014, at the time when the company declared it’s Q4 2013 results. [3] Due to the export restrictions and the ultimate suspension of operations in Indonesia after its storage facilities were filled to capacity in June, Newmont’s consolidated copper sales stood at $101 million in the first half of the year, significantly lower than the figure of $169 million for the corresponding period last year. [4] [5] The suspension of operations at Batu Hijau through most of the third quarter will result in a substantial drop in copper production in Q3. However, the fall in shipments will be lower ethan the fall in production as the company will sell its stocks of concentrate from its storage facilities.

Portfolio Optimization

Newmont completed the sale of its interest in the Penmont joint venture in October. [6] 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 since last year. [7] The company intends to redeploy capital into projects that offer better returns. Asset sales and operational improvements have helped lower the company’s all in sustaining costs (AISC) metric, which stood at $1,063 per ton in Q2 2014, around 17% lower 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 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. 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. Thus, just like in Q2, the company is expected to report lower year-over-year AISC figures in Q3.

Expectations from Conference Call

With the resumption of normal operations in Indonesia, the company management is expected to provide a revised guidance for production and shipments from its Indonesian operations. We would also like to know from the management if there are any additional asset sales on the horizon, considering the subdued  prevailing gold pricing environment. This should shed some light on the road ahead for Newmont.

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((PTNNT Suspends Operations At Batu Hijau, Newmont News Release))
Notes:
  1. Newmont Signs Agreement to Sell Stake in Penmont Joint Venture in Mexico, Newmont News Release []
  2. Janet Yellen Warns of Uncertain U.S. Economic Outlook, Financial Times []
  3. Newmont’s 2014 Production, CAS, AISC And Capital Outlook, Newmont Website []
  4. Newmont’s Q2 2014 10-Q, SEC []
  5. PTNNT Suspends Operations At Batu Hijau, Newmont News Release []
  6. Newmont Completes Sale of Stake in Penmont Joint Venture in Mexico, Newmont News Release []
  7. Newmont Signs Agreement to Sell Stake in Penmont Joint Venture in Mexico, Newmont News Release []