Lower Gold, Copper Prices And Shipments Weigh On Newmont’s Q3 Results
Newmont Mining (NYSE:NEM) announced its third quarter results on October 30 and conducted a conference call with analysts on October 31. The company reported third quarter revenues of $1.75 billion, around 13.6% lower year-over-year. Net income for the third quarter stood at $213 million, around 46.5% lower year-over-year. [1] Lower realized gold and copper prices as well as shipment volumes adversely affected the company’s Q3 results, as compared to the corresponding period a year ago. As the company announced the resumption of normal operations and exports from Indonesia only at the end of Q3, it reported a sharp fall in its copper mining revenues. Indonesia accounts for a majority of Newmont’s copper production.
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Gold Prices
Newmont’s average realized gold price for the third quarter stood at $1,270 per ounce, down from $1,322 per ounce in the corresponding period last year. ((Newmont’s Q3 2014 Earnings Presentation, Newmont Mining Website)) Revenues from gold sales accounted for 92% of Newmont’s total revenues in 2013. [2] Thus, the fall in gold prices played a major role in the deterioration of the company’s results.
Gold prices have fallen over the course of the last year, reacting to cues regarding the 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.
Segment-wise Performance
Gold sales fell from $1.81 billion in Q3 2013 to $1.61 billion in Q3 2014. Lower shipment volumes accounted for $131 million of this decrease in sales, with lower realized prices primarily responsible for the rest of the decline in gold sales. [1] Gold production in Q3 fell 10% from 1.28 million ounces in Q3 2013 to 1.15 millon ounces in Q3 2014. [4]
Attributable gold production fell 18% at the North American mining operations from 520,000 ounces in Q3 2013 to 428,000 ounces in Q3 2014, primarily due to planned waste stripping campaigns at the Carlin, Phoenix and Twin Creeks mines and the sale of the Midas mine earlier on in the year. [1] Attributable gold production in the Australia/New Zealand region fell 20% from 468,000 ounces in Q3 2014 to 376,000 ounces in Q3 2014, due to the mining of lower grades at the Tanami mine and the sale of the Jundee mine, which was completed on July 1. [1] Attributable production declined 8% for the South American mining operations from 148,000 ounces in Q3 2013 to 136,000 ounces in Q3 2014, due to the planned processing of lower grade stockpiled ore. [1] The declines in production in North America, Australia and South America was offset by a 48% increase in attributable production at the company’s African mining operations, due to the ramp-up of production at the Akyem mine, which started production in Q4 2013. [1]
Copper sales fell to $139 million in Q3 2014 from $215 million in the corresponding period last year. [1] 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 operations resulted in a fall in sales from $136 million in Q3 2013 to $61 million in Q3 2014. [1] Newmont’s average realized price fell to $2.71 per pound of copper in Q3 2013 from $3.10 per pound in the corresponding period last year, further negatively impacting results. [5]
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 would have risen progressively to 60% by 2016. Newmont contended that the export tax violated the terms of its contract with the Indonesian government. The company halted its exports from Indonesia in January pending negotiations with the government over these regulatory changes. [6] With the negotiations between the company and the Indonesian government not yielding satisfactory results, Newmont suspended production at its Indonesian operations in June. The company ultimately announced the signing of a Memorandum of Understanding with the Indonesian government, that allowed it to resume normal operations at Batu Hijau. [7] 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. [5]
Costs
The company’s efforts at cost reduction and productivity improvement showed results with the All-in Sustaining Cost (AISC) metric for gold production falling to $995 per ounce in Q3 2014 from $1,018 per ounce in the corresponding period last year. [8] 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. The company has generated $630 million in savings on its gold all-in sustaining costs in the first nine months of the year, with about half of the savings attributable to lower costs applicable to sales. [5]
Other Developments and Outlook
The company announced that it received the Right of Exploitation for its Merian gold mine from the Government of Suriname in August, which triggered the start of construction activities at the mine. The Merian mine is expected to commence commercial production in 2016. The mine is expected to produce 400,000-500,000 ounces of gold annually. [5] With an expected AISC of $750-$850 per ounce, it is a fairly low cost asset, as compared to the AISC for Newmont’s overall gold mining operations, which stood at $995 per ounce in Q3 2014. [5]
The company maintained its gold production guidance at 4.7-5 million ounces for 2014, despite the sale of the La Herradura mine in October. [4] With the resumption of normal operations in Indonesia, the company has raised its copper production outlook for 2014 to 80,000-90,000 tons of copper, from its earlier guidance of 55,000-80,000 tons. [4]
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Notes:
- Newmont’s Q3 2014 10-Q, SEC [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]
- Newmont’s 2013 10-K, SEC [↩]
- Janet Yellen Warns of Uncertain U.S. Economic Outlook, Financial Times [↩]
- Newmont’s Q3 2014 Earnings Release, SEC [↩] [↩] [↩]
- Newmont’s Q3 2014 Earnings Presentation, Newmont Mining Website [↩] [↩] [↩] [↩] [↩]
- Indonesian Government Relaxes Its Stance in Tax Dispute with Freeport and Newmont, Forbes [↩]
- PTNNT to Resume Operations and Copper Concentrate Exports, Newmont News Release [↩]
- Newmont’s Q3 2014 Earnings Conference Call Transcript, Seeking Alpha [↩]