Cost Reductions Boost Newmont’s Q1 Results Despite Weak Gold Prices
Newmont Mining (NYSE:NEM) announced its first quarter results on April 23 and conducted a conference call with analysts the next day. Despite lower gold prices, the company’s adjusted net income, which excludes the impact of non-recurring items such as impairments, rose from $121 million in Q1 2014, to $229 million in Q1 2015. [1] Given the subdued gold pricing environment, the company’s cost rationalization efforts played a major role in boosting the company’s quarterly results. The company’s revenues rose to $1.97 billion in Q1 2015, up from $1.76 billion in the corresponding period last year, primarily as a result of higher gold and copper shipments.
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Gold Prices and Shipments
Newmont’s average realized gold price for Q1 2015 stood at $1,203 per ounce, down from $1,293 per ounce in the corresponding period last year. [2] Revenues from gold sales accounted for 90% of Newmont’s total revenues in 2014. [3] Thus, the fall in gold prices weighed on the company’s results.
Gold prices have fallen over the course of the last year, reacting to cues pertaining to the tapering of the Federal Reserve’s Quantitative Easing (QE) program. Gold as an investment is often viewed as a hedge against inflation and economic weakness. The tapering of QE implied strengthening U.S. economic growth, which reduced the investment demand for gold and led to a fall in prices of the metal. 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 sometime in 2015. [4] However, the exact timing of an interest rate hike is contingent upon the pace of economic and jobs growth in the U.S. [5] An interest rate hike is likely to limit the upside for gold prices, as investors shift towards higher yielding assets.
The company’s gold shipments rose marginally to 1.19 million ounces in Q1 2015, up from 1.17 million ounces in the corresponding period last year. [1] The company’s shipments rose year-over-year, despite a loss of around 100,000 ounces in production as a result of the divestment of high-cost mines. [2] This was primarily because of an increase in gold shipments from the Batu Hijau mine in Indonesia, as a result of the resumption of normal operations in Indonesia after the standoff between the company and the Indonesian government, over the issue of export taxes, ended in Q3 2014. [2] In addition, the mining of higher grade ores boosted the company’s production at its Yanacocha mine in Peru. [2]
Copper Prices and Shipments
Newmont’s copper shipments rose to 85 million pounds in Q1 2015, as compared to 35 million pounds in Q1 2014. [2] This was primarily due to the sale of stockpiled ore from the company’s Batu Hijau copper mining operations in Indonesia, where operations were suspended for four months in 2014 as the company negotiated with the Indonesian government over regulatory changes which impacted the company’s operations in the country. Normal operations resumed at Batu Hijau at the end of September. However, the impact of an increase in shipments was partially offset by a fall in realized prices.
The company’s average realized price for copper fell to $2.34 per pound in Q1 2015, as compared to $2.50 per pound in Q1 2014. [2] The fall in realized prices was mainly due to weakness in demand for the metal, particularly from China — the world’s largest consumer of copper, where slowing economic growth has dampened demand for the metal. Chinese GDP growth is expected to slow to 6.8% in 2015, from 7.4% in 2014, which has negatively impacted demand for the metal from China. [6]
Costs
Newmont’s efforts at cost reduction and productivity improvement were mainly responsible for an improvement in the company’s quarterly results. The company’s All-in Sustaining Cost (AISC) metric for gold production fell to $849 per ounce in Q1 2015, from $1,034 per ounce in the corresponding period of 2014. [2] 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 better gauge the company’s performance.
The improvement in the company’s AISC metric can be attributed to the company’s cost reduction initiatives and the sale of high-cost mining assets, in addition to the mining of higher grade ores at various mines, most prominently the Batu Hijau and Yanacocha mines. In addition, the strengthening of the U.S. Dollar against the Australian Dollar lowered the costs of the company’s gold mining operations in the Asia-Pacific region.
Outlook
Going forward, the company management stressed that disciplined capital allocation will remain the strategy for Newmont. The company realized $800 million from non-core asset sales in 2014 and $1.4 billion over the last two years. [7] Given the prevailing environment of subdued gold prices, the company intends to focus on its core, low-cost gold mines, and a project pipeline that is focused on developing low-cost mines in the near term. The Merian mine in Suriname is currently the company’s only greenfield project. When it commences production, the Merian mine is expected to produce at an AISC of $650-750 per ounce in its first five years of production, which compares favorably with Newmont’s company-wide AISC of $1,002 per ounce in 2014. [8] Focusing on such low-cost gold mines will position the company to operate more competitively in a variety of gold pricing environments, particularly the prevailing environment of low gold prices.
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Notes:
- Newmont’s Q1 2015 Earnings Release, SEC [↩] [↩]
- Newmont’s Q1 2015 Earnings Presentation, Newmont Mining Website [↩] [↩] [↩] [↩] [↩] [↩] [↩]
- Newmont’s 2014 10-K, SEC [↩]
- Powell says Fed could hike rates mid-2015; cites low inflation, Reuters [↩]
- Investor Expectations for Fed Rate Increase at June 2015 Meeting Slip, Wall Street Journal [↩]
- World Economic Outlook, IMF [↩]
- Newmont’s Q4 2014 Earnings Call Transcript, Seeking Alpha [↩]
- Newmont’s Q4 2014 Earnings Presentation, Newmont Mining Website [↩]